Locking rates on new construction

6 Replies

Hey all,

This should be a quick one. When building a new home, how early can one expect to lock-in an interest rate? I know most locks are 30-60 days but does that differ with new construction? The home in question won't be competed until December '14.

Thanks in advance!

The answer will depend on the finance arrangement for the construction segment. If you are financing the construction, then you will need a specific construction loan. Those loans are short term and must be refinanced upon maturity.

Some lenders will offer a "construction to permanent" (or "construction perm") loan which, from a borrower perspective, is one loan transaction. The opposite is a separate loan for each segment resulting in two transactions (purchase & refinance). In construction perm loans the construction portion automatically turns into permanent finance upon the end of the construction term.

It is really only in the construction perm loans that they will provide rate locks well in advance (some at origination) of the permanent loan. In the other setting, with two separate loans and transactions, you would be subject to normal lock periods like any other loan because that is essentially all it is. A standard loan used to refinance the construction loan.

In any standard loan you can lock with most lenders further into the future but you will have to pay for the lock, which is why most folks stick with the norm of a 30 day lock.

All in all, most borrower do not control when their rate is formally locked. That is something your MLO will do. More often than most folks know, the locks are set at 15 days. That is likely a topic for anther thread.

Originally posted by @Loren Whitney:
Hey all,
This should be a quick one. When building a new home, how early can one expect to lock-in an interest rate? I know most locks are 30-60 days but does that differ with new construction? The home in question won't be competed until December '14. Thanks in advance!

Good Questions Loren, I may be able to shed some light on this for you since I work with new home builders here in CA.

Extended rate lock programs provide a long term lock as a benefit to buyers but the cost for them are either an upfront cost based on a percentage of the loan amount or a rate premium added to today's current prevailing rate.

For instance, to lock for 180 days a borrower can pay 1% of the loan up front in addition to a rate premium of .375%.

So if today's prevailing rate is 4.375%, 30 day lock, your 180 day lock would be 4.75% with 1 pt cost.

Depending on the builder and their incentives offered, your rate addition or upfront cost may be subsidized to make it more attractive for you as the buyer to purchase and sign up with an extended rate lock program.

Extended lock options vary and are designed to add value to both the buyer and the builder since it gives the buyer insurance against future interest rate risk and the builder receives protection on their accounts receivable/inventory.

If you're obtaining your own construction loan and take out/perm financing in one package, local/community banks may be a better option for owner occupied construction or spec build financing products. These will combine the construction credit facility along with the permanent financing product.

Thanks for the help guys, very good information.

@Loren Whitney

Maybe I'm missing something or its just banks I used in Texas, but rates were prime plus 1 or 2%, never a fixed for a term. I've had them change monthly where my interest carry was low and when project completed were higher and vice versa. I've built about 400 homes up until 2007 so I have a little experience in the subject.

@Barry Ratliff  


Sounds like you are talking about the credit extended to you as the builder.  The comments above are consumer retail, yours would have been commercial in nature.  There are structural differences between the two, as you point out.   Apples and oranges.

No bank wants a builder to sit on the asset once completed. At the same time, during the construction period high interest demands are not in the best interest of the deal either. The risk in this type of loan structure would have pointed many banks to use ARM's and to float with PRIME to keep pace with the market.

@Dion DePaoli

Dion you are correct. Mine were commercial loans. I was not aware of consumer loans for new construction other than construction to perm or one time close. When he was referring to a spec home I assumed it was a commercial type ARM loan. But to answer @Loren Whitney question to locking in, unless there is a float down option if rates go lower after u lock I'd just let it ride. I assume this is an interest only loan. Rates are gonna stay consistently low for awhile.

Join the Largest Real Estate Investing Community

Basic membership is free, forever.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.