Applying for a construction loan can be made difficult when deciding on whether or not to lock in or float your interest rate. There are factors to consider before making a decision.
When you first become approved for a construction loan, your interest rate will most likely be based on what type of loan it is. If you are owner builder, your rate will most likely be high. Lenders usually set a higher interest rate because these construction loans are riskier.
Construction to permanent loans are usually lower because there is a contractor overseeing the building and risks are lower. This is a good time to decide on whether or not you want to keep it for the life of the construction loan or change it. Most banks are willing to lock in the interest rates right away.
Influences in Locking Your Rate
These things will influence whether or not you should lock in your interest rate.
1. The type of loan program you have; construction to perm, jumbo, or owner builder
2. How high or low your interest rate is
3. How many points do you have
4. How long is the lock period
5. Fees to lock in rate
Floating Your Rate
Floating rates are good as long as they are low. A good housing market will influence your interest rate. Some buyers will float their interest rates because they feel future interest rates will drop. This could backfire if rates increase instead.
The best thing to do is go over your interest rate with the lender. Find out about the market. If it is thriving and you already have a low interest rate, consider locking it.
Also get as much information about the type of loan you have. That will influence your interest rate a great deal.