Looking to buy land and build your dream home from the ground up? A land loan can help make that possible. But land loans work a bit differently from traditional mortgages so it’s important to understand how land loan mortgage rates and terms differ.
In this comprehensive guide, we’ll cover everything you need to know about land loan mortgage rates, including:
- What is a land loan?
- How do land loan rates compare to mortgage rates?
- What factors determine your land loan rate?
- Tips for getting the best land loan rate
- Alternatives if you can’t get an affordable land loan rate
What is a Land Loan?
A land loan, also known as a lot loan, is a type of financing used to purchase a vacant plot of land. Land loans allow you to buy property to build a home or other structure on in the future.
With a land loan, you can secure your preferred lot now and finalize construction plans without having to rush to build right away. Land loans give you the flexibility to purchase land separately from obtaining construction financing.
Land loans typically have higher interest rates, shorter repayment terms, and stricter eligibility requirements compared to conventional mortgages This is because land itself provides no cash flow or rental income to repay the loan.
How Do Land Loan Rates Compare to Mortgage Rates?
In general, land loan rates run 1-2 percentage points higher than mortgage rates for a primary residence.
For example if current 30-year fixed mortgage rates are averaging around 6% 30-year land loan rates could be around 7-8%.
Land loan rates are higher because they are considered riskier and have less collateral than mortgages. There’s no home or building on the land to serve as security for the lender.
Land loan terms are also shorter, usually 10-15 years versus 30 years for a conventional mortgage. The shorter payback period results in higher monthly payments.
Here’s a comparison of current land loan rates versus mortgage rates:
| Loan Type | Rates |
|---|---|
| 30-year fixed mortgage | 5.5% to 6.5% |
| 15-year land loan | 7% to 8% |
| 10-year land loan | 7.5% to 9% |
As you can see, land loan rates for both 15-year and 10-year terms are markedly higher than current 30-year mortgage rates. The shorter the land loan term, the higher the rate.
What Factors Determine Your Land Loan Rate?
When applying for a land loan, your individual qualifications and financial profile will determine the rate you pay. Key factors lenders consider when setting land loan rates include:
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Credit score – Borrowers with higher scores (720+) qualify for lower rates. Those with poor credit pay more.
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Down payment amount – Typically 10-50%. Larger down payments get better rates.
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Debt-to-income ratio – Your total monthly debt payments vs gross monthly income. Lower DTIs get better rates.
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Loan term – Shorter terms mean higher rates. 10-year loans cost more than 15-year loans.
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Land type – Raw land gets higher rates than improved parcels.
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Development plans – Detailed plans can mean better rates from some lenders.
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Relationship with lender – Existing banking relationships may provide discounts.
The stronger your financial profile, the better land loan rate you can qualify for. Work on improving your credit, reducing debt, and boosting your down payment to land the lowest rate.
Tips for Getting the Best Land Loan Rate
Follow these tips to help secure the most favorable land loan rate:
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Shop around – Compare quotes from multiple lenders. Local banks and credit unions are good options.
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Ask about discounts – See if your bank provides rate discounts for existing customers.
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Boost your down payment – Putting down 20-50% shows you’re financially committed.
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Pay down debts – Reducing your DTI ratio can mean a lower rate.
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Choose longer terms – Opt for a 15-year over a 10-year loan term to get a lower rate.
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Provide detailed plans – Having specifics on your construction plans may help reduce rates with some lenders.
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Improve your credit – Aim for a minimum score of 720. Pay down balances and correct errors.
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Consider seller financing – Rates are often higher but it provides alternative financing.
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Add a co-borrower – Applying with another borrower with better credit can mean better rates.
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Lock in early – Interest rates are expected to rise, so lock in your rate as early as possible.
Alternatives if You Can’t Get an Affordable Land Loan Rate
If you aren’t able to qualify for a competitive land loan rate, here are a few alternatives to consider:
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Seller financing – The seller provides all or part of the financing at a negotiated rate.
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Home equity loan – Tap available equity in your current home if rates are lower.
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USDA loans – These government loans have fixed low rates but limited availability.
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Construction loans – Combination loans cover land purchase and construction costs.
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Land contract – Similar to rent-to-own where seller retains title until you pay the full amount.
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Crowdfunding – Use crowdfunding platforms to raise funds from multiple sources.
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Wait and reapply – Take time to improve your financial situation and credit and reapply later.
While land loan rates are higher than mortgages, smart shopping and improving your financial credentials can help you get the lowest rate possible. Understand all your options for financing land purchases.
How to use the land loan calculator
So you’ve found your ideal tract and determined which type of land loan you need to pursue in order to purchase it.
The next step is figuring out the true overall picture of any hypothetical loan, so you know exactly how much you can afford. This information will be helpful to have in hand by the time you set a meeting with a loan officer.
Here’s how to use the land loan calculator:
- Plug in your ideal loan amount (how much does the land cost?)
- Choose an estimated interest rate (you can view the current rates on the Federal Reserve’s website)
- Input your down payment (you can enter either the dollar amount or percentage of purchase price)
- Pick what your payment frequency will be (will you make payments monthly, quarterly, semi-annually, or annually?)
- Insert your ideal loan term (how many years will you be paying off the loan?)
Once you plug in your numbers and click “Calculate,” you’ll see what your monthly payment would be, total interest amount, and total amount you would pay over the life of the loan. You’ll also see a full amortization schedule (make sure to save this for future reference).
Remember to play around with different numbers. The point of a land loan calculator is to see how the numbers shift when a variable (like interest rate or loan term or downpayment) changes – without having to do the math by hand. So plug in several different options and see how your payments vary.
Could you potentially afford a higher monthly payment if it meant saving some money in the long run? Is there a certain interest rate threshold you need to stay under? What kind of loan term is realistic according to your short- and long-term goals? A land loan calculator can help answer all these questions.
Important disclaimer: No land loan calculator can tell you with 100% certainty what your loan will look like in practice. The tool should only be used for estimation purposes. You’ll still need to fulfill any lender’s requirements and be approved for a land loan. Please also note that extra costs like taxes and insurance are not included in these calculations.
Many mortgage companies offer or require you to escrow taxes and insurance. As an ag lender, we do not require you to escrow for taxes and insurance. But just because it is not included in your monthly payments in the loan calculator, make sure you do some research to determine what those additional costs might be.
What type of land loan is right for me?
Depending on your geography, goals, and budget, there are several different types of land loans to choose from:
- Ranch/Recreational Land Loans: This type of loan is helpful for people wanting to turn a tract of land into hunting grounds, a vacation spot, or a camper’s paradise.
- Rural Real Estate Loans: For those interested in purchasing raw acreage, future farmland, or a spot to build a future home.
- Ag Loans for Farm, Ranch, and Timber: Ready to launch an agribusiness? You’ll need an ag land loan if you hope to farm timber, start up a beef cattle ranch, or plant row crops.
- Land Improvement Capital: More of a secondary loan for those who already own land. A land improvement loan can help you find funds to dig a well, construct a barn, or build a bridge or fence, for example.
How to Get a Land Loan (And What to Know Before You Do)
FAQ
Are mortgage rates the same for land?
What loan is best for land?
What is the longest land loan you can get?
What are current land loan rates in Texas?
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Term
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Rate
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APR*
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5 Year
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6.25%
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6.89%
|
|
10 Year
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6.50%
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6.85%
|
|
15 Year
|
6.50%
|
6.75%
|
|
Minimum Loan Amount is $15,000 Required Down Payment is 20%
|
|
|
Do land loans have higher interest rates?
Land loans may have higher interest rates or require a down payment as high as 50%. Mortgage banker Dave Krichmar explains, ‘Land loans are not a standard loan option, the terms are specific to the bank or lender doing it. They’re not like a 30-year mortgage with industry-standard interest rates.’ (Best Home Improvement Loans)
Is a land loan more favorable than a mortgage?
For these reasons, land loans may feature less favorable terms than mortgages. They may have higher interest rates or require a down payment as high as 50%. Land just isn’t as in demand as homes. Everything You Need to Know About Land Loans | Mortgages | U.S. News
What makes a good land loan?
The purpose and current use of the land can dictate the terms of the loan. Unimproved “raw” land is usually the hardest to finance or get with favorable terms. Lenders consider raw land as the least desirable collateral for all land uses. Most will require more money down (up to 50 percent) and charge a much higher interest rate.
Do land loan rates depend on your credit score?
Like any other loan, the interest rate will largely depend on your credit score. That said, land loan rates are typically higher than traditional mortgage rates, thanks to the inherent risk and only the land as collateral. And the repayment term? A land loan from a bank often is a five-year adjustable-rate loan with a balloon payment at the end.