How to Hedge if Interest Rates Increase When Building a Home

If interest rates increase when building a home, buyers need to prepare.

Are you concerned about handling a situation in which interest rates increase when building a home? If not, you should be. Depending on where you are building a home in Sacramento, it could take 4 to 6 months (or longer) to finish building your home. What happens if interest rates increase when building a home? You could get socked with a much higher interest rate. The rate could be so high that it could disqualify you from buying a home. Or, put a severe crunch on your financial cash flow.

Last September, interest rates remained around 3.75%. Today, interest rates hover at about 4.30%+. Fact, every 1%  an interest rate rises loses a buyer about $25,000 of purchasing power. Some buyers do not understand the direct correlation between sales price purchasing power vs interest rates. However, you should keep interest rate fluctuation in mind when buying new construction. Also, think about how you’ve locked in the price of the home when you signed the purchase contract. Sales prices may go up but your pre-negotiated home price remains stable.

In fact, many first-time home buyers put so emphasis on interest rates that they often forget about the sales price remaining the same on that new home. This is not to say that as interest rates increase when building a home you should not be concerned. Because options exist. If a rate increase to 5% is not comfortable for you, you might want to consider taking our insurance against a rate hike. Yes, you can pay a little bit more to your lender and lock your interest rate for 6 months or more.

The question should be is it worth it? Historically, over the past 10 years or so, I’d say no, it wasn’t worth it. If you paid for an extended loan lock, you were probably wasting money. But if you’re the type of home buyer who doesn’t want to handle this kind of surprise, maybe you should consider an extended loan lock. I cannot sugar coat this; welcome to higher interest rates in 2018.

Interest rates have been superficially supressed for so many years that John Q Public does not remember what can happen. They think of 3.5% or 4% as the norm, but that is shortsighted. Average interest rates used to be 8%. In the early 1980s, rates hovered as high as 18%. Over the last few years, fewer investors elected to purchase a CD or money market due to low returns. Everybody knows rates must go up. But how fast and when? Many experts say now, this spring. Some experts predict interest rates will rise four times in 2018.

Talk to your lender about what can happen should interest rates increase when building a home. Try to prepare for that eventual situation in advance. Don’t get blindsided days before closing when suddenly your mortgage payment jumps and you can’t afford it. You might also consider buying a home a little bit under your means so you’re not stretched to the max when interest rates rise.