Wo-hoo! You have made the decision to purchase a brand-new house in a quaint, wooded Pennsylvania neighborhood, replete with the aroma of a home that has never been occupied before.
However, we are here to provide you with a reality check in order to ensure that you keep your money where it belongs—in your pocket. Because even if you lock in a mortgage rate on your soon-to-be-built home, you still can find yourself having to spend more money than you anticipated when it comes time to close the deal.
Why? The interest rate that a lender is willing to provide you is only valid for a certain amount of time, and we are all aware that delays in building are not exactly unheard of.
According to Mark Polack, branch manager at Huntington National Bank in Pennsylvania, mortgage rates are typically locked in for a period ranging from thirty to forty-five days, depending on the institution. In light of the fact that it is anticipated that mortgage rates will continue to climb, what steps can you take to protect yourself? Here is how you may retain your initial interest rate on your new-construction loan while still saving a significant amount of money.
What Happens to Your Loan if the Construction is Delayed
When it comes to acquiring a mortgage, the process of buying a new house that is still in the construction or building stage is a little bit different than buying a home that has already been lived in.
You won’t be able to close on a newly built house, much alone move in unless the home has been given a certificate stating that it is fit for human habitation. This certificate is a permission that declares the home was constructed by the building business in accordance with the requirements that were established by authorities from the local government.
However, as a result of the present twin whammy of a scarcity of construction workers and problems with the supply chain, many of today’s purchasers of new-construction homes face the possibility of building delays that might stretch beyond the 30- to the 45-day period covered by their rate lock. And it’s possible that your interest rate may change before the house is done being built.
How exactly does it translate into dollars and cents? Let’s imagine that you have $60,000 available for a down payment on a property that costs $300,000. If your rate increased by 0.5 percentage points between the time your offer was accepted and the time the loan was closed, you would have to pay an extra $25,920 over the course of the loan’s lifetime. How much house do you think I can afford? Utilize our Affordability Calculator to determine the price range that you are comfortable paying for a property.
Using Rate Extensions Might Help You Protect Yourself
If you are encountering construction delays and your rate lock is getting close to its expiration date, you may want to think about extending your rate lock in order to lock in your rate in accordance with the parameters of the current market. Unfortunately, the majority of extensions do not come without a cost. You are making a larger payment upfront in order to maintain your current lower interest rate.
According to Polack, the charge to prolong the rate lock is normally 0.45 percent of the total loan amount. The available alternatives change based on the particular lender that you decide to work with. Therefore, if the loan is for $300,000, the cost of extending it by 30 days would be $1,350. A fee of $4,050 would be required for a 90-day extension.
According to Polack, “generally speaking, you would most likely do 30-day increments in the present climate.”  “It is essential that you be aware that the possibilities vary based on the lender that you choose; nonetheless, many of them provide the possibility of a 180-day extension.”
Questions to Ask Your Lender Upfront
Are you still looking at other mortgage options? Then you should make it a priority to devote some time to studying so that you may save yourself thousands of dollars.
“Some lenders have more flexibility in extending your rate, while others are more rigorous,” explains Adam Fuller, a senior loan officer at Mortgage 1 in Pennsylvania. Fuller works at the company’s Grand Rapids branch. If your lock period has expired and you aren’t working with the correct lender, you could have to bring more money to the closing table or pay more on your mortgage each month if the rate goes up.