What Are Average Land Loan Rates in 2023? A Detailed Guide

Purchasing land to build a home or start a business can be an exciting prospect. However, land purchases require specialized financing known as land loans, which have higher interest rates than traditional mortgages. In this comprehensive guide, we’ll break down everything you need to know about current average land loan rates and how they work.

Land loans, also called lot loans, allow buyers to finance the purchase of vacant land. These loans tend to come with higher interest rates and stricter requirements compared to mortgages for existing homes. This is because land loans are riskier for lenders – if the borrower defaults, the lender is left with undeveloped land that is difficult to resell.

Land loans typically require higher down payments, shorter repayment terms, and thorough plans detailing the intended use of the land. Approval often depends on factors like credit score, debt-to-income ratio, down payment amount, and the type of land being purchased.

Current Average Land Loan Rates

According to the mortgage data website HSHcom, current average land loan rates as of January 2023 range from 7.5% to 9% for a 30-year fixed-rate loan By comparison, average 30-year fixed mortgage rates for homes sit around 6.5%.

Land loan rates tend to be 1-2 percentage points higher due to the increased risk factors mentioned above. Shorter-term loans usually have slightly lower interest rates, while rates on adjustable-rate land loans currently average around 6.5 to 7%.

The exact rate offered will depend on your financial profile, the amount of your down payment, and general market conditions Those with excellent credit and sizable down payments can likely secure rates on the lower end of the average range.

Factors That Influence Land Loan Rates

Several key factors determine the land loan rate lenders will offer

• Credit score – Borrowers with higher scores are seen as lower risk and qualify for better rates. Scores of 700+ are recommended for land loans.

• Down payment amount – Larger down payments reduce the loan amount and risk for lenders, potentially earning lower rates. 20-50% is common.

• Loan term – Shorter terms have lower rates. Common land loan terms are 5, 10, 15, and 30 years.

• Type of land – Improved land with utilities access is less risky than raw, undeveloped land.

• Development plans – Detailed, feasible plans can give lenders confidence in your ability to repay.

• Overall market rates – When broader interest rates rise, land loan rates tend to as well.

Land Loan Rate Comparison by Lender

It’s wise to shop around and compare offers from multiple lenders when seeking a land loan. Here are average rates from several top national land loan providers:

• Farm Credit – 7.25% (30-year fixed)
• Farmers National Bank – 7.5% (30-year fixed)
• FNB Finance – 7.3% (30-year fixed)
• PlainsCapital Bank – 8.25% (30-year fixed)
• Gold Star Finance – 8.5% (30-year fixed)

As shown, long-term fixed rates can vary by over a full percentage point between lenders. Be sure to get multiple quotes before choosing the best loan option.

Strategies to Get a Lower Land Loan Rate

If current average land loan rates seem too high for your budget, here are some tips that could help you secure a lower rate:

• Shop around – Get quotes from multiple lenders and compare carefully. Even a small rate difference can mean big savings.

• Boost your credit – Good credit scores can make lenders more likely to offer their lowest rates.

• Make a larger down payment – Putting 20% down or more gives lenders confidence and reduces risk.

• Choose a shorter term – Opt for a 15-year loan over a 30-year to reduce interest costs.

• Provide detailed plans – Lenders like to see feasible plans for land development to justify a lower rate.

• Consider owner financing – Sellers may offer financing at reasonable rates. But terms are usually shorter.

Common Land Loan Repayment Terms

In addition to higher interest rates, land loans frequently have different repayment terms than typical home loans. Some possibilities include:

• 5-year balloon – Interest-only payments for 5 years, principal due as a balloon payment at the end.

• 10-year maturity – Fully amortized over 10 years with monthly principal and interest payments.

• 15-year fixed – Standard fully-amortizing 15-year fixed-rate loan.

• 30-year fixed – Closer to a traditional mortgage but with a higher land loan rate.

The term that works for you depends on factors like your budget, development timeline, and plans for the land. A financial advisor can help weigh the pros and cons of each repayment structure.

Alternatives to High-Rate Land Loans

A few options exist if you need financing but want to avoid high land loan rates:

• USDA loans – For rural properties, these government-backed loans offer below market fixed rates.

• SBA 504 loans – For commercial properties, these provide low fixed rates with 10% down.

• Home equity loan – Use equity in your current home to borrow at lower mortgage rates.

• Owner financing – Sellers may offer their own financing at reasonable rates.

• Crowdfunding – Pool small investments from a crowd of backers.

• Partnerships – Join forces with others to buy land together.

While still your best option in many cases, it pays to explore alternatives if possible to avoid paying the premium rates charged by most land loan lenders. An accountant can advise on the financial implications of each.

Common Uses for Land Loans

There are several common situations where buyers turn to land loans for financing:

• Building a primary residence – Land loans help pay for vacant land to construct a home on.

• Starting a farm – Farmers use land loans to purchase acreage for crops and livestock.

• Opening a business – Retail, industrial, or office land can be purchased with a land loan.

• Building a vacation/investment property – Loans finance land for second homes or rental cabins.

• Creating a mobile home park – Land loans allow buyers to develop a mobile home community.

• Building multifamily housing – Apartment complex or condo developers use land loans.

• Installing solar/wind farms – Renewable energy companies finance open land for solar or wind farms.

Always discuss your particular needs with lenders to ensure you get a loan suited for your specific plans.

Is a Land Loan the Right Choice?

While land loans allow buyers to purchase and develop vacant property, they come with big tradeoffs. Before obtaining financing, carefully consider:

• Can you afford the large down payment requirement?
• Are you comfortable with higher interest rates?
• Can you pay off the loan within the shorter repayment term?
• Do you have clear plans for developing the land?

For those with sufficient capital, credit, and a feasible vision, a land loan can be a worthwhile investment in building your dream home or business. But proceed with caution – while exciting, land development involves major financial risk. Consulting with business partners or family can provide wisdom.

With average rates currently hovering around 8%, a land loan is a big commitment. But for certain buyers, the ability to purchase that perfect acreage makes it well worth the cost. Weigh the benefits and drawbacks carefully as you chase your goals.