American’s ability to finance real estate purchases is something that bends and sways withe the ever-changing climate of the global and national economy. There is one thing that remains constant, though, which is that when interest rates on Land are low, people tend to buy more of it!
This is of course true with all such investments. There is no better way to make money or acquire things than with the OPM: Other People’s Money, and Real Estate is no exception. There are however important differences to be noted between the financing of say a house, and the financing of raw Land. It is important to understand these differences if you are considering acquiring some land and think that financing is your best (or only) option.
With interest rates as low as they are today, many people are looking at financing the purchase of a home. We have seen interest rates as low as 0.9%-1.5% on home mortgages, which means your barely paying more than you would with cash! When it comes to raw land, however, the cheapest rates in the US hover somewhere around 4.5%-5%, which intuitively doesn’t make sense to most people. And for good reason:
There really is nothing safer than raw Land when it comes to making a purchase, for the simple fact that nothing can really happen to it. It seems like a safe thing for banks or lenders to loan on, since it will always be there and must appraise in order to be financed anyways, right? The moment we build a house on our property, it seems that the interest rate should go up, not down, since that home’s value is more subject to economic swings, and is, by definition, temporary.
The real reason behind the inverse relationship between the value and safety of raw Land and improved land loans is this: Governmental Regulation.
You see, when you decide to build a house (and get a construction loan) or buy a house (and initiate a mortgage), the lender you work with is allowed to sell your debt to a larger lender or fund. For this reason, they can act as a middle man and pull a quick profit off of minor interest rate increases. This is how the current US financial system works.
When you decide to finance raw Land however, the lender must understand your property and be willing to hold that loan “in-house” until you decide to transition into a construction loan or mortgage. For this reason, it only makes sense that they need to charge slightly more for the loan, as it remains a portion of their portfolio throughout its duration.
The good news is, there are many lenders who work closely with honest, dependable developers, and when you find one, you will likely be given the chance to finance your land and make minimal payments during the time leading up to your decision to build.
Remember, that developers and other sellers of land will not be capable of discussing specific loan rates or terms with you, as they are not financial advisors or lenders themselves. The most they can offer is recommendations of those lenders they work best with, and this list is one of the most important things you can receive during your land buying process, as it will save you time and make the land of your dreams a reality for your budget.