Rate increases can impact new-build mortgages

You can’t close on a new-construction home—or move into the property—until the home receives a certificate of occupancy. This certificate is a permit that states the construction company safely built the house according to the standards set by local government officials.

Yet, with the current double whammy of a construction worker shortage and supply chain issues, many of today’s new-construction home buyers face building delays that could extend beyond your 30- to 45-day rate lock. And your interest rate could expire before the home’s finished.

So how does that break down financially? Let’s say you’re buying a $300,000 home with a 20% down payment. If your rate went up 0.5% between your offer and closing, you’d shell out an additional $25,920 over the life of the loan.

If you’re facing construction delays and your rate lock is approaching its final days, you might want to consider an extension to lock in your rate with current market terms. Unfortunately, extensions aren’t usually free. You’re paying more upfront to hold on to your lower interest rate.

The options vary depending on the lender you choose, but typically the fee to extend the rate lock is 0.45% of the loan amount, says Polack.

So if the loan is $300,000, then a 30-day extension would cost $1,350. A 90-day extension would set you back $4,050.

“Some lenders have more flexibility in extending your rate, but others are more rigid,” said Adam Fuller, a senior loan officer at Mortgage 1 in Grand Rapids, MI. “If your lock expires and you’re not with the right lender, you may find yourself bringing more funds to closing—or paying more for your monthly mortgage payment.”

Fuller advises asking the following questions when you interview prospective lenders:

What happens when the mortgage rate lock expires?

Is there an option to renew the lock?

Is it possible to extend the lock for no charge?

Are there fees to extend the rate lock?

How long can I extend the lock?

What happens if my house is now complete and rates are now lower?

Is it possible to secure a reduced interest rate?

Once you’ve talked to at least three lenders about how you can protect yourself with a rate lock extension (or possibly secure a lower rate), you’ll be able to choose the one that offers you the most flexibility.

A builder that constructs a large volume of similar houses in planned developments generally offers in-house financing. And there might be some advantages for a homebuyer to go this route. For starters, the builder might offer incentives—think fancier appliances—to use its lender.

Plus, when the builder has a close relationship with the lender, you’ll likely have certain assurances that construction will be completed on time, meaning the lender will fund the loan as promised. In that case, you might not have to worry about delays and higher interest rates.

A builder’s in-house lender might also provide rate-lock protection programs to secure a rate for up to 12 months to offer its customers peace of mind. There might still be a fee to lock in extended interest rates.

So it’s wise to look at the big picture and assess how it will affect your monthly payments and how much you will save over the life of the loan. Don’t assume you are getting the best interest rate and loan terms by using the builder’s in-house or preferred lender. It’s always wise to compare offers from various lenders.

Realtor.com provided this report.

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