Will 8 Percent Interest Rates Break the Fence the Home Building Market is Sitting On?

New Construction

blog,Mortgage / October 21, 2023

The real estate market is a dynamic landscape, influenced by a multitude of factors. One such factor that’s been garnering significant attention is the interest rate on home loans. As prospective homeowners contemplate the decision to build their dream homes, the current 8 percent interest rate has raised a few eyebrows. In this blog post, we’ll delve into the implications of an 8 percent interest rate, comparing it to the more conventional 6 percent rate, and explore the dilemma faced by clients who are hesitant to part ways with their current 2 to 3 percent interest rates.

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1. Comparing Costs: $1 Million Loan at 8 Percent vs 6 Percent

The interest rate on a construction loan is a pivotal determinant of the total cost of building a home. Let’s break down the numbers for a $1 million loan:

8 Percent Interest Rate: With an 8 percent interest rate, clients can expect higher monthly ($7,337.65) payments and end up paying approximately $1.64 million in interest over a 30-year term.

6 Percent Interest Rate: At a 6 percent interest rate for the same loan amount, the monthly payments ($5,995.51) and total interest paid ($1.15M) would be significantly lower, making it a more financially viable option.

Even clients that can afford the higher payments realize lost opportunity of investing an extra $1,300 a month over 30 years.  At a modest 5 percent return that is another $1M in assets that could be saved versus putting towards the monthly mortgage payment.

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2. Hesitation to Let Go of 2 to 3 Percent Rates

Many clients are understandably hesitant to let go of their current low interest rates, which often fall in the 2 to 3 percent range. These rates have been historically low due to various economic factors of 2020 when rates dropped and the real estate market was artificially enhanced by the Federal Reserve buying mortgage backed securities.  The transition to an 8 percent rate can be a psychological hurdle for clients who are making the decision to stay where they are vs leave their low rate.

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3. Second Mortgage Rates vs 8 Percent 1st Mortgage

For clients sitting on substantial equity in their current homes, there’s an intriguing decision to be made. If they stay at their current home, they can keep their low mortgage and tap into the equity with a second mortgage.  However, many clients are finding that the second mortgage rates are nearing 12 percent.  Should they sell their existing home to tap into the equity and avoid the 12+% rates or stay put, keep their 2-3% low 1st mortgage and bite the bullet on a second mortgage?  This is a legit debate many families looking to upgrade their existing vs building a new home are having.

Factors to Consider:

Equity Position: Clients should assess the amount of equity they have in their current home.

Future Financial Goals: Consider how the decision aligns with long-term financial goals, including retirement planning and overall wealth-building strategies.

Market Conditions: Analyze the current real estate market conditions, including property values and interest rate trends.

The 8 percent interest rate has indeed stirred conversations within the real estate market. However, it’s important to approach this decision with a well-informed perspective. At SG Home Builders, we understand the significance of this financial commitment, and we’re here to provide guidance and support every step of the way. Whether you’re navigating the transition from ultra-low interest rates or considering leveraging existing equity, we’re committed to helping you make the best decision for your unique circumstances. Building your dream home is an investment in the future, and with the right knowledge and guidance, it’s a venture that can lead to lasting fulfillment and financial stability.