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Low Interest Rates: 8 Helpful Tips For Financing And Building Your Custom Dream Home

Updated: May 1

In the last quarter of 2020, construction loan rates were at a staggering low of 3.25 to 4 percent. This led to a huge increase in market home and custom-built home sales throughout the country.

Research from 2020 also determined that Cincinnati ranked second place for the fastest home sales. The sale of custom-built homes plays a huge role in the city’s high rank. Low interest rates allow buyers to build their dream homes without having to settle for less.

Custom Home Interior

Are you considering custom home building in the Cincinnati area? There are a few strategies to help you obtain competitive interest rates. Read on to discover eight useful tips for financing and building your new home.

1. Start Soon To Secure Low Interest Rates

To secure the best interest rate for your home, you should start planning and strategizing this year. In 2020, custom home builders produced a record number of homes due to increased purchasing power. The decrease in interest rates made homes more accessible for buyers.

Experts suggest that this trend will continue through 2021, too. Because of this, now is an excellent time to take advantage of the growing home-building trend. If you’re not sure where to begin, consult with a custom home builder about floor plans, the building process, and more.

2. Understand Construction Loans Versus Traditional Mortgages

Construction loans cover the costs of building and renovating homes. If you’re familiar with traditional mortgages, you should know that they differ greatly from construction loans. From approval to funding, each step is very unique.

Application And Approval Process

Applying for a construction loan consists of the standard process of meeting credit and income criteria. However, you’ll also need to provide the lender details for your project. Cost estimates are particularly crucial information for lenders.

Third-party lenders may also have to approve of the company that builds your custom home. If you get financing through a custom home builder, this whole process can be a bit easier. They’ll help you work out cost estimates, and you don’t have to worry about company approval.

Disbursement Of Loan Funds

Traditional mortgage loans are paid out differently than construction loans. Traditional loans are paid out in a single lump sum when closing on a home. Loan repayment terms and rates differ, too.

When it comes to construction loans, the lender disburses the loan to the contractor versus the homeowner. The costs are transferred to you after the home building process is complete. Repayment and rates depend on the type of construction loan you get.

Lenders pay builders in installments often referred to as draws. Disbursement of funds occurs when specific phases of construction are complete. For example, draws may be paid out at the completion of:

  • Pouring the home foundation

  • Under-the-roof construction

  • Exterior siding installation

In most cases, an inspection takes place before a draw is paid out to the home builder. The payment made is based on how much work is completed. The number of draws from start to finish varies depending on the project.

3. Understand The Types Of Construction Loans

There are two types of construction loans to consider when you’re building a custom home. They are called “construction-to-permanent” loans and “construction-only” loans.

There are unique factors to consider about both types of loans. These will help you determine which loan is suitable for your financial situation and preferences.

Construction-To-Permanent Loans

Construction-to-permanent loans are also called single-close loans. The funds from the loan cover the cost of construction and your long-term mortgage. Funds are dispersed during the building process, and then they convert into long-term loans.

The aspects of a long-term loan are like any traditional home loan. You’ll choose between a fixed-rate or adjustable-rate loan. The repayment terms are standard 15 or 30-year terms. The benefits of construction-to-permanent loans are:

  • Predictable interest rates for long-term financial planning

  • A single set of closing costs, which reduces your overall expenses

The main downside to this type of loan is that a significant down payment is required. In most cases, the minimum down payment is 20 percent.

Construction-Only Loan

Construction-only loans are also called two-close loans. This type of loan solely covers the cost of constructing your home. Once construction is complete, you must apply for a separate long-term mortgage loan.

There are some benefits to construction-only loans. It’s suitable if you currently own a home and cannot afford a large down payment. In this scenario, your current home is used as collateral for the loan. Construction-only loans can also help cover construction costs that exceed your budget.

This type of loan is typically more expensive than a construction-to-permanent loan. Instead of one-time costs, you’re responsible for paying two loan application fees and two closing fees.

You also don’t get the advantage of securing a mortgage rate at the beginning of the building process. This means you risk paying higher rates when you apply for a home mortgage.

Choosing A Loan Type

If you’re not sure which type of loan is best for you, consult with a custom home builder. You can tell them about your building plans, goals, and ideal budget. Experienced home builders can help you determine which loan type suits your needs.

4. Know What Expenses Are Covered

Before you apply for a loan, ask the lender what expenses are covered. Construction loans are designed to cover a wide variety of expenses and cater to custom home building. A few examples of expenses covered include:

  • Land

  • Plans, permits, and fees

  • Labor and materials

  • Closing costs

  • Contingency reserves (in case the project costs more than estimated)

  • Interest reserves (if you don’t want to make interest payments during building)

In many cases, lenders will provide financing for the soft costs that arise during the home building process. These are any costs that aren’t directly related to construction. Examples of soft costs include design fees and land permits.

5. Gather All Of Your Credit Information

Your credit score and history will always play a major part in qualifying for a construction loan. Obtaining your credit report may help you obtain a lower interest rate for your loan. You can use the information to:

  • Calculate your debt-to-income ratio.

  • Proactively reduce your debt through payment plans, negotiations, etc.

  • Dispute and resolve potential errors on your report.

Get your free annual credit reports from Transunion, Equifax, and Experian. You can request one report per year from each of the three major credit bureaus.

It’s also crucial to obtain your FICO score(s) from one or more of the credit bureaus. This is the three-digit number that indicates if your credit is poor, fair, good, or excellent.

Lenders use your FICO scores to determine interest rates, too. Knowing your score - and boosting it if possible - can help you discover what loans you’ll qualify for.

6. Determine How Much You Can Afford

Current homebuyers can now afford more than usual thanks to lower interest rates. It’s still important for you to calculate how much you can afford for your new home. Expenses that you should keep in mind include the costs of:

  • Foundation - The lot your home is built on impacts the total cost. For example, it’s more expensive to build on a hill than on flat land.

  • Floorplans - The style, size, and layout of your home play a big part in fees. Your home builder will discuss options and pricing with you.

  • Framing - The cost of framing includes lumber, steel, and any other materials used to build your home’s frame.

  • Interior Finishes - There are dozens of factors to consider with interior finishes. Examples include the cost of insulation, drywall, cabinets, flooring, and lighting.

  • Exterior Finishes - The materials used for your home exterior impact the cost. Factor in the price for exterior walls, roofing, gutters, windows, and doors.

You can see why it’s crucial to set a budget for your new home. To help determine how much you can afford, consider the tips listed below.

Both of the lists above are great ways to get started, but they are not all-inclusive. The building process is unique for every home, so there is a lot of information to consider. To get a full list of costs, you’ll need to consult with an experienced custom home builder.

7. Know The Criteria For Loan Approval

To get approved for a home construction loan, you need to meet lender criteria. The exact details vary with each lender, but most of them have basic requirements. To qualify for a loan, you typically need the following:

  • A good to excellent credit score

  • Proof of stable income

  • A low debt-to-income ratio

  • A down payment of 20 to 25 percent

To increase your chances of loan approval, look for a lender that offers flexible financing solutions. Homebuyers often find that custom home building companies offer diverse financing options. This option can help you secure a lower interest rate, too.

8. Ask These Questions Before Applying For Loans

Covering all of your bases is crucial if you want the lowest interest rate. Before you meet with lenders, make a list of questions you have about the loan process. Some questions you should include are:

  • “How long have you been providing home construction loans?”

  • “What is the down payment required for a home construction loan?”

  • “How long does it usually take to process a home loan request?”

  • “How long does the building process take?”

  • “What happens if the building process is delayed?”

The answers you get will vary depending on the lender. A trustworthy lender will have the experience and knowledge to address your questions and concerns.

This is another scenario where it’s beneficial to get financing through your home builder. Expert builders are very familiar with both the financial and construction aspects involved.

Take The Next Step Forward: Contact Ashford Homes

If you are considering building a custom home in the Cincinnati area, consider Ashford Homes to meet your unique housing needs. With over 55 years of combined experience, we pride ourselves as experts at custom home construction.

We strive to work with budgets and present loan options to meet individual needs. To see what we can do for you, call 513-442-5555 and schedule an appointment.



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