It's a tough question for anyone looking to build a new custom home: Do I wait for home construction loan interest rates to go down or move forward on my project?
High interest rates have (unfortunately) become a fact of life in recent years, and they're not just limited to loans for real estate or home construction. Auto, student, and personal loans all have a higher price tag when all is said and done. Combined with inflation (as it is at the time of writing this article), high interest rates have made any major purchase a bigger financial investment than in recent memory.
So what's going on exactly and how did we get here?
Let's unpack all that
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Custom Home Construction Loan Interest Rates: Past, Present & Future
Before we go into the ongoing history of interest rates, let's first take a quick detour into how they factor into your custom home building project.
Unless you're paying for your project completely out of pocket, you'll likely finance building your custom home with a construction loan from either a traditional bank or a third-party lender. This type of loan is typically released in installments (or draws) as the project hits key milestones toward completion. At the conclusion of the build, the loan is converted into a traditional mortgage – where current interest rates come into play.
Back to where interest rates have been, are, and are going...
How did we get to this point with interest rates on a 30-year fix-rate mortgage spiking from a low of 2.66% in 2020 to now flirting with crossing the 8% mark?
Let's look at the past and present, as well as to the future.
Past Trends
Historically, interest rates have fluctuated between high and low. In the 1970s, they skyrocketed to nearly 20% in response to high inflation. Then in the early 1980s, they plummeted to record lows due to a recession.
During the last 10 years, interest rates have experienced significant fluctuations. Following the financial crisis of 2008-2009, rates were kept at historically low levels to stimulate economic growth. This period of low rates extended well into the 2010s, making it an ideal time for home builders and buyers to secure financing at minimal costs. However, as the economy began to stabilize and grow, rates started to inch upward. By the late 2010s, there was a noticeable increase, influenced by Federal Reserve policies aiming to keep inflation in check while supporting a steadily growing economy.
Present Conditions
Currently, interest rates are experiencing a period of volatility, primarily influenced by global economic uncertainties and domestic fiscal policies. The onset of the COVID-19 pandemic led to a sharp decrease in rates as part of broader economic relief efforts. However, with the economy recovering, rates rose to record levels not seen in decades for a variety of reasons:
- The Federal Reserve has implemented multiple rate hikes since early 2022
- Federal Reserve also reduced its securities holdings, which include both U.S. Treasury and mortgage-backed securities
- Just plain old economic reactions to global and domestic economic conditions, such as geopolitical tensions, creating market volatility
Future Outlook
This is one where even the best economists don't have an answer you can take to the bank.
Predicting interest rates involves understanding a complex interplay of economic indicators and policies. Economists suggest that while rates may stabilize or even go down, the potential for unexpected shifts remains due to factors like governmental fiscal policies, global economic disruptions, and inflation trends. Most projections indicate a gradual increase in rates over the next few years, driven by efforts to normalize economic conditions post-pandemic.
So where does all of this leave you?
Probably still weighing the original question about waiting mortgage interest rates out or simply moving forward on your dream home project.
Risk vs. Reward Vs. New Home Construction Interest Rates
Why Waiting on Your Project Might Not Be the Best Bet
The here and now is simple: new home construction interest rates are what they are. It's impossible to know where they'll end up and no one has a crystal ball about them.
While it might seem financially prudent to wait and see what happens, there is a risk to that. Indeed, rates might improve. Then again, they might not, and rather than a cheaper loan to pay back the only thing you've gained is a longer project timeline.
Regardless of which direction rates go, there are other factors to consider that impact your build's final bill and can increase:
- Economic Changes: Broader economic factors can impact the housing market and construction costs. A downturn can lead to tighter lending conditions, making it harder to secure a loan later, or an upturn can significantly increase costs.
- Regulatory and Zoning Changes: Changes in local regulations or zoning laws can affect building permissions, costs, and the feasibility of certain projects. Waiting might mean new restrictions or requirements that can complicate or increase the cost of building.
- Availability of Contractors: The availability of skilled contractors and builders fluctuates. A current surplus might turn into a shortage, leading to higher costs or delays in project timelines if you wait.
- Land Prices: The cost of land, like house prices, can fluctuate based on market conditions. Delaying the start of a building project could mean paying more for the same plot of land later.
- Life Circumstances: Personal or family circumstances can change, impacting one's ability to finance or need for a custom home. Health issues, changes in job status, or other personal factors could make it more challenging later.
All of this is to say that there can be a high cost to waiting for interest rates to go down, enough so that you'd have been better off moving forward to begin with. And remember: if interest rates do go down, you can always explore refinancing to eliminate their high toll on your monthly mortgage bill.
To Build or Not to Build?
Let's take new home construction loan interest rates out of the picture for a minute.
There is a misconception about panelized custom home construction that we and our Barden Independent Dealers regularly have to correct: If you're not ready to build by the beginning of the construction season (spring), you'll have to wait another year to start.
The truth of the matter is that perception is false. In reality, there's no better time to start your custom home project than right now – and yes, you can build during the winter.
Custom home construction projects take time. There's plenty to do long before the actual building starts:
- Design and planning
- Materials sourcing
- Labor logistics
- Site prep
- Securing finances
- The list goes on
Simply put, even if you come to the table knowing exactly what you want your custom home to look like down to the smallest detail – or if you're just using one of our floor plans unaltered – it will still be a few months before move-in day.
What's more, the longer you wait to start your project, the more it opens it to many of the same risks as waiting for construction loan interest rates to (hopefully) lower. For instance, the cost of materials can go up – and stay up – pretty quickly.
Home Building Loan Interest Rates & Moving Forward on Your Project
While high construction loan and mortgage interest rates can be viewed as a major hurdle to overcome in realizing your dream home, there's no guarantee that playing the long game until lower rates return will work how you hope. Sure, you might get a more favorable rate eventually, but in the meantime, you might have lost out on other factors that could have saved your project time and money.
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