How Do Increased Interest Rates Influence My Payment?
Isn’t it exciting to think about building your dream home from the ground up? You get to pick out the perfect floor plan, imagine the best layout, and think about all the custom designs you want.
Before you get too consumed with all the fun stuff, let's discuss something equally important - your mortgage payment. We're talking about how interest rates can influence your payment for your new construction home.
In this article, we'll break down how increased rates affect your mortgage payment so that you can start building your dream home while keeping your finances in check.
How Rising Interest Rates Affect Pre-Approved Buyers
First, it's important to understand that getting a pre-approval letter means a lender has reviewed your financial information and determined how much you can afford to borrow. When interest rates rise, this is due to banks making it more costly for borrowers to borrow money. Higher interest rates can impact your pre-approval in a couple of ways.
Higher interest rates usually decrease the amount of money you can borrow to build your house. As a result, you may not be able to afford the house you wanted because you have higher monthly payments. Depending on the total cost of your construction, this could push the total loan amount beyond what you're pre-approved for, causing you to have to come out of pocket to make up the difference or cut back on some of the elements you want in your new home.
Likewise, higher interest rates can make it more challenging to qualify for a loan altogether. If interest rates are high, lenders may have more strict requirements for borrowers, making getting approved for your loan more difficult.
Understanding Interest Rate Fluctuations
Interest rates vary from month to month, sometimes increasing over an extended time. Inflation influences bond market fluctuations, which, in turn, affect interest rates for mortgage loans.
The Federal Reserve does not determine the mortgage interest rates. However, they influence where these rates originate: the Mortgage-Backed Securities (MBS) market. Investors use this to trade bonds containing groups of mortgage loans, and the movement of these bonds impacts interest rates.
Another factor that influences home loan rates is demand. If lenders experience higher demand for their loan products than they can accommodate, they may raise their rates to reduce the number of applications submitted.
Strategies for Navigating Higher Interest Rates
Now that you understand how higher interest rates work, there are a few strategies that you can use to help lessen the effects of higher rates.
The most common strategy is to lock in your interest rate. To do this, you agree to a fixed interest rate with your lender, which protects you from further rate increases. Keep in mind that there may be fees associated with locking in your rate, so be sure to ask questions and weigh the pros and cons.
Another strategy is to shop around for the best rates. Don't be afraid to compare loan estimates from different lenders and negotiate for the best deal. Even a slightly lower interest rate can significantly affect your monthly payments and affordability. Most buyers will compare rates from at least three lenders before locking in a rate.
New Construction Financing Options
There are several loan options available to suit your specific needs, with the most popular ones being construction-to-permanent loans and standalone construction loans. Construction-to-perm loans, also known as “one-time close” loans, combine the financing for both construction and mortgage into a single loan, making the lending process very simple. Standalone construction loans, on the other hand, only cover the construction costs and require you to secure a separate mortgage once the building process is complete.
An alternative option is to explore the financing available through your builder. Some builders might have in-house financing programs or have teamed up with trusted outside lenders. You can then receive better interest rates or more flexible terms, which could make a big difference in your wallet.
How NewHomesMate Can Help You
Searching for a new home can be difficult, especially with the numerous loan options within a rate-changing environment. That’s where a NewHomesMate agent can guide you by helping you navigate through the complexities of building a home. Our team of realtors are passionate about connecting you with reputable lenders who understand the ins and outs of the new construction loans available.
Ready to take the first step toward your dream home? Create an account to begin your search and connect with a realtor in your area.