No one’s talking about these loans with rising interest rates


Sharp Credit – Credit News – Credit Information

What’s happening with interest rates on loans for land acquisition, development and single-family construction pretty much goes against everything being said about rates lately.

News on plummeting mortgage rates has been flooding headlines on housing, but interest rates for AD&C loans are trending upward, according to the National Association of Home Builders.

Elevated rates

The average interest rate recorded on land acquisition loans was 6.59% in the second quarter, followed by 6.49% on loans for land development, 6.21% for speculative single-family construction and 5.97% for loans for pre-sold single-family construction. For each category, the average rate was higher than either the start of the year or the fourth quarter of 2018, according to NAHB.

Aside from rates on loans for land acquisition, average interest rates were the highest they’ve been since the start of 2018. The increases come at a time when the Federal Reserve’s target federal funds rate remained stable.

Higher rates mean higher costs for construction loan borrowers that are likely passed on to consumers.

“A higher interest rate on the outstanding balance drawn against an AD&C loan can, potentially, be offset by reducing points charged on the initial loan commitment. Recently, in fact, loans for single-family construction have shown this tendency,” said a NAHB report.

“In the second quarter, average points on loans for speculative single-family construction declined from 79 to 71 basis points, and on loans for presold single-family construction from 65 to 45 basis points — in both cases the lowest they’ve been since NAHB began collecting the information in the first quarter of 2018. Meanwhile, the second-quarter averages of 99 basis points on loans for land acquisition and 103 on loans for land development remained at or near their post-2017 peaks,” the report said.

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