What alley said. If you have the funds and the ability to afford a rate hike, go ahead. The rates are not going to suddenly swing up by multiple points but only you know your tolerance risk.

If you're buying this house where any rate change would create a situation where you're house poor, then you're certainly not ready to build.

I was not following the markets when younger, but I do remember my parents bought a home when interest rates were around 16%. As mentioned above, rates are still at historic lows and have been kept artificially low for many years.

You can't borrow "free" money for ever! Looking forward to earning more interest on cash in the bank!

Have you already closed? I'd find a new bank. We chose a one close loan for this reason. We're locked in at 3.75 (jumbo) and haven't broke ground yet.

Poolroom - I've never heard of this, can you please provide some insight.

Not sure about poolroom, but our bank offered us a 10/1 ARM at 3.5% (Q2 2016), single close before construction starts, one year of interest only, and then it converts to the 10/1 ARM. We only put 10% down, so we also avoided mortgage insurance by going this route, they simply increased the interest rate by an 1/8th point instead (which is a huge savings over mortgage insurance at half a point or more).

Then, at some point in the next 10 years when we've got 20% equity, we'll convert it to a fixed mortgage. The payment will probably stay the same when you account for the higher interest rate and the reduced amount owed in the future.

Let me also add: The less you can put down, the better. We certainly didn't expect 25k in rock excavation fees. Money is as cheap as it will ever be, so leverage yourself while you still can, and never forget to consider opportunity cost.

I agree...definitely shop around. We are set to break ground in two weeks. We have a locked in rate that increased following the election (3.7% to 4.0%); however, our bank will let us refinance for free if the rate drops during our building period.

if a quarter or half point change in the interest rate puts you into trouble you need to either save more money or build a cheaper house. There are bigger surprises than that awaiting you.

With interest rates now starting up, you do NOT want an ARM mortgage! You want a 30 yr fixed rate or if you can afford it, a 15 yr fixed rate mortgage. God only know what interest rates might be in 10 years -they could have gone so high you will have to sell as a fixed rate mortgage could be very high. I still remember 15-17% mortgages in the late 70's early 80's. We added on to our small house that had a 5 1/4% mortgage - buying a larger home was completely out of the question.

If you don't qualify for a low fixed rate mortgage, then you probably cannot affor to buy a house and certainly not to build. Being house poor us a horrible place to be.

Most 10/1 ARM's have a cap of 2% a year so even if it is sky-high, it would still be an advantage in 10 years. And most have a top cap too. Ours I believe is 8%, which is high but if rates are up in the stratosphere again like in the 70's, we'd still be ahead of the game using the money in the bank to generate larger returns. When building, most banks will not give you a fixed rate loan. We were only able to get a 10/1 or a 5/1 and we were putting down something like 40%.

Can someone please provide some insight, as I've never heard of this. we won't be breaking ground until Spring, however if we can lock in now, I'd be ecstatic. I've talked to numerous banks, no one has ever mentioned anything like this.

You can't lock in until you start your build and then you have 1 year to complete the build.

CPA - Poolroom said they are locked at 3.75 and haven't broken ground yet...I'm wondering how some are finding this option. I've only ever heard of a contruction loan and then you can lock 30-60 days out of final inspection/occupancy.

New construction programs vary by region and even then you'll come across many different programs within a metro area. Start with the large local banks to see what they have.

I did a 7 year arm @ 3.125% and 5% down. I was able lock the loan but had to break ground within 60 days. Its been interest only for 1 year. In theory I could go another 1 year if I didn't draw the entire amount.

With today's economy and house values you're likely going to be ahead on an arm. The day of high rates in the 80s and 90s are gone. My in laws built a house with a 1/2 acre lot in 1995 for $150K. That same house with equivalent lot costs $500K today. Home values and wages just won't allow for those rates.

Under 4% for a construction loan is great; take it. Rates are higher in my state. 90 day lock @4.25% and that's not easy to come by either.

Joe, if you can afford it, it's a good time to make the leap. We were buying our first house and DH built his office in the 15-18% years (we were lucky to get 12 on an assumable loan, but those aren't around anymore). While I don't think we will see those rates again, I also believe that rates are headed up and a significant increase could put you out of the market for a long time.

We locked a jumbo 7 year arm one close construction to perm at 3.125 (70% down, which if interest rates rise a lot we may regret) about a month or so prior to breaking ground with an 18 month window. The 7 years doesn't begin to run until it converts to perm so basically 8.5 years until the rate can escalate. Which is ironically almost exactly when we must start taking required distributions from our retirement accounts.

BK, my guess is that pool is about to break ground and is just waiting for permits. That's what happened with us.

BK, we were able to lock into a fixed rate prior to beginning construction; however, the bank required our building contract, plans, building specs, site survey, etc. in order to accomplish this.

Mortgage rates are a lot more complicated than the Fed rate, they are going to move a bit but they should settle down pretty soon.

Many people believe that home mortgage rates and even the prime rate are simply based on the Fed rate which is really not true. The Federal funds rate certainly influences the prime but not linearly. I am going to oversimplify this a lot but mortgages are a lot like any inventoriable product. You buy from a supplier at a set price and you sell to customers. Certainly the amount you have to pay sets a floor on the amount you charge but it doesn't set the price. Supply and demand sets the price.

This gets more complicated by banks selling the mortgages, almost all banks are currently selling mortgages because they don't pay enough to keep. Banks are actually adversely affected by interest rate hikes also. They have 8 years of record low loans that are locked in, and the proceeds from those loans are used to pay depositors. That is essentially how banks work, they pay money to depositors and mark that up for loans. The interest rate spread is essential for making money. Alternately, they can sell the loans to a third party and get paid an origination fee.

The kicker to this idea is that banks have to have loans. If the interest rate moves up enough that buyers decide not to pursue a loan (or buy a home) then the banks are screwed. The second kicker is - as loans start paying higher interest and stocks slow down (see bottom note) there is more demand for mortgages from businesses that buy mortgages. So competition for the better mortgage rates as an investment actually drives the rate down a bit.

TL,DR:

Typically, we see rates go up and then settle down a bit before they move up again. This needs to happen fairly slow or it creates a shock that grinds things to a halt. I believe you are safe for the next couple of years. Frankly, I would bet interest money will still be stupid low for the next 5 to 10 years, but the crystal ball gets a little cloudy at that distance.

Note: I have seen half a dozen talking heads on the news giving reasons that the Fed is raising interest rates. I can't tell you whether they are just oversimplifying it for the public or they are really that bad, but they are mostly wrong. The Fed is currently very concerned about the PE ratios in the stock market. They are way too high and, actually, way above the danger zone. The Fed needs to slow the stock market down, they have needed to for a while but didn't do anything during the election to be safe. The market responded to Trump's election very differently than they thought and now they have to act. The primary reason for the rate hike is that they have to get investors out of the stock market and into the bond and debt market. There are other reasons, such as employment and the economy that have an impact but many of those are offset by artificially low international rates.

Check other banks. Our loan rate was locked in when we signed the initial papers, before we even broke ground. We had to furnish the same as Lizzie said.

I don't see what choice you really have, other than finding a new bank (and realistically, that process is going to take a lot longer than 1 month). If rates at closing are too high for you to afford you'll have to walk away.