Instead of buying a prebuilt home, some clients decide to build their own home. When you, (or your builder), are building a home from the ground up, it could be months or even years before you need your mortgage financing. Depending on market conditions, it could be advisable to get a “builder’s rate hold” mortgage. This is allows you to hold a, “worst case scenario” rate for the completion date of your new home.
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When would I need a Builder’s Rate Hold Mortgage?
You would need a builder’s rate hold when the “completion date” of your build is more than 120 days from the date that you secure your financing approval. Build times can be anywhere from 6 months to 2 year depending on the complexity of the build, the location or the type of property that you’ve purchased. Lenders offer a variety of different types of rate holds ranging from 6 months to 2 years. Your mortgage broker can help guide you the in direction that moves you toward achieving the best rate hold for your specific build.
How do Builder Rate Hold’s actually work:
Here is an example. Let’s say that you and your REALTOR® walked into a show home on July 1st and decided to write on offer on a new property. The property is expected to be completed in April the following year. This means that you need a rate hold for approximately 10 months. Let’s say at the time that you wrote the offer, mortgage rates were sitting around 1.8%. In the next 10 months, you’re not sure if rates are going to go up and down, so you want to put a ceiling on your risk to the upside. You work with your mortgage broker and you put a rate hold in for 2%. There are 3 potential outcomes, the rates could go up, go down, or stay the same. At the time of writing this blog, January 2022, there are expectations for us to see rates increasing (or going up).
Outcome one: Rates go up.
When February or March comes around, mortgage rates have increased and they are sitting at 2.5%. Because you had your rate hold, you secured a rate at 2.0%, you’re in good shape and you will use your rate hold mortgage to close the transaction.
Outcome two: Rates go down.
When February or March comes around, mortgage rates have decreased, and they are sitting at 1.5%. In this case, your rate hold mortgage will not be needed. You and your mortgage broker will either work with the lender that holds your rate hold mortgage to decrease the rate, or your mortgage broker will move the deal to a new lender with the most competitive rates.
Outcome two: Rates go stay the same.
When February or March comes around, mortgage rates have are the same, and they are still sitting at 1.8%. In this case, (just like in the outcome where rates decreased), your rate hold mortgage will not be needed. You and your mortgage broker will either work with the lender that holds your rate hold mortgage to decrease the rate, or your mortgage broker will move the deal to a new lender with the most competitive rates.
Do I need a Builder’s rate hold if I’m using a draw mortgage?
The one type of builder’s mortgage that doesn’t include a rate hold is a draw or construction mortgage. This mortgage funds over the completion of the build in multiple stages. The minute that the first funds are advanced to the builder (typically at the stage that the foundation is complete), the rate for that mortgage is set.
Summary
Overall, if you’re considering a new build, it’s important to work with a mortgage broker and Realtor that can help you understand the risks of building a home vs. buying a previously owned home. Understanding the impact that a change in rate can have on your monthly payments is important as this can play with your monthly budget. Make sure that you and your mortgage broker run several scenarios so that you’re well versed in all the possible outcomes!
Spire Mortgage Team
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