Is Interest Rate on Construction Loan 8% Worth it?

Question

I got pre-approval for a construction loan for 8% qualifying rate (not final).  What is the current going rate these days ?

How much is too much ?

Barry Ruby · Answer

@Mark Bringas

Too much = when the deal doesn’t work

Scott E. · Answer

The group I'm borrowing from calls themselves a private lender but they are more similar to a traditional bank than your typical private money guy/gal. Licensed loan officers, underwriters, etc.

I actually just refinanced with these guys. Was paying more to a hard money lender.

Jay Chang · Answer

Hello there, and congratulations on your decision to start investing in real estate.

Since there is no collateral (the house has not yet been built), construction loan rates are slightly higher than standard loan rates. This increases the likelihood of default, making lenders wary.

P+1% construction loans are common. P is the prime rate, which is currently approximately 9.5%, so P+1 would be 9.5 % right now. 8% is a reasonable interest rate. However, many banks do not now offer building loans and need 20% relationship deposits. You might look into a hard money loan with a rate of around 12%. The drawback is that it has a lot of fees, so if you can, stick with construction financing.

Construction loan interest rates can be fixed or variable, which means they fluctuate based on the index to which the rate is linked. Variable loans often begin with lower interest rates than fixed loans but can increase or drop monthly based on market rates. Construction loans are used to pay for only the construction of a dwelling. The overall loan balance becomes due after the construction is completed. You can either pay it off in full or get another loan (such as a standard mortgage) to cover the balance.

Keep in mind that if you do this and then take up a new mortgage to pay off the construction loan, you will be required to pay closing costs twice.

Doug Smith · Answer

Is this a construction loan for you to build a personal house or is this an investor spec build? The market for a construction loan for a person building their own home is actually right on or a bit higher. An investor spec build is actually in the 12% range. That being said, rate is just a number. Does the math work? Do you make money by doing it? Yes, the rates are much higher now, but if a deal works mathematically...do it. If not...walk away.

Dana Georgiou · Answer

I agree with @Doug Smith here.  It is all about the math.  Also, are you paying that interest rate on the total loan balance on day 1?  If so, there are options (depending on your experience) for a non-dutch loan.  Meaning you only pay interest on what you draw.  We have specialized in New construction and tear down/rebuilds for the last 20 years.  www.streamlinefunding.com

Henry Clark · Answer

Questions:

1.  How long is the construction period?

2.  What is the average balance over that period?

3.  Compute the total interest spend.

How does that figure work in your deal analysis?      What happens after wards?  At the “rate”?

Scott E. · Answer

I'm building 2 homes right now and paying 12% interest on my debt (no points).

Is Interest Rate on Construction Loan 8% Worth it?

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