Finding the Best Construction Loan Rates in Arkansas

If you’re looking to build a new home in Arkansas, one of the most important things to consider is the interest rate on your construction loan. Construction loans typically have higher rates than traditional mortgages, but the rates can vary significantly between lenders. Finding a lender that offers competitive construction loan rates in Arkansas is key to keeping your project affordable.

In this article, we’ll discuss everything you need to know about construction loan rates in Arkansas including

• What affects construction loan rates
• Average rates in Arkansas
• Tips for getting the best rate
• Factors that impact your rate
• Comparing loan quotes

What Affects Construction Loan Rates

Construction loans are a unique lending product, so their rates are influenced by some different factors than a typical mortgage Here are some of the key things that impact construction loan rates

• Your credit score – Just like any loan, your credit history and score will be a major factor in determining your interest rate. The higher your score, the better rate you can qualify for.

• Loan-to-value (LTV) ratio – The loan-to-value ratio compares how much you’re borrowing to the completed value of the home. The lower the LTV, the better the rate.

• Size of the loan – Construction loans come in all sizes, from small projects to multi-million dollar homes. The bigger the loan, the higher the rate may be.

• Construction costs – Total construction costs factor into rates. More expensive projects often get higher rates.

• Builder reputation – Your builder’s reputation and financial strength can affect the loan terms. Unproven builders often lead to higher rates.

• Economic conditions – When the economy is stronger, rates tend to be lower across lending products.

• Lender market competition – Different lenders have varying appetites for construction lending. More competition can create better rate environments.

Average Construction Loan Rates in Arkansas

According to data from the American Bankers Association, current construction loan rates in Arkansas average around 7-8% for a 1-year adjustable rate construction loan. Fixed rate loans will be slightly higher in the 8-9% range. However, that includes all credit types and situations. Individual factors like your credit score and down payment can result in rates above or below that average.

Over the past two years, rates have been on an upward trend as the Federal Reserve has raised its benchmark rate. In early 2020, average construction loan rates were closer to 4-5%.

While we can look at statewide averages, it’s important to know that each individual scenario is different. The best way to know your personalized rate options is to apply with multiple lenders.

Tips for Getting the Best Construction Loan Rate

Here are some tips that can help you secure the most competitive construction loan rate in Arkansas:

• Get quotes from multiple lenders – The easiest way to find the best rate is to cast a wide net and apply with several lenders. All lenders use their own pricing models.

• Ask about discounts for loyalty – Some credit unions and community banks offer discounts on construction loans if you have an existing relationship.

• Look for limited-time discounts – Lenders sometimes offer discounts for a certain period of time to attract more business.

• Pay points to buy down your rate – You can lower your rate by paying points upfront, each point typically reduces your rate by .25%.

• Boost your credit score – Even a small score improvement can mean better loan terms. Pay down debts and dispute errors.

• Lower your LTV with a larger down payment – Putting 20% or more down on construction can lead to a better rate.

• Use an experienced local lender – Specialized construction lenders tend to offer better expertise and rates.

• Consider a shorter term loan – Shorter terms like 12 months often have lower rates than 18-24 month construction loans.

The bottom line is that you have options as a borrower – shopping around is the best way to leverage those options and find lenders competing for your business.

Factors That Impact Your Construction Loan Rate

While we’ve looked at average rates, the reality is that your specific scenario and qualifications will determine your actual interest rate on a new construction loan. Here are some major factors that influence the rate you’ll be offered:

Credit Score

Your credit score is one of the biggest drivers of your construction loan rate. Borrowers with scores of 740 or higher qualify for the very best rates, while people with scores below 620 will see higher rates and more stringent requirements. Maintaining excellent credit is key to keep rates low.

Loan-to-Value (LTV) Ratio

The LTV ratio is calculated by dividing the loan amount by the completed home value. A lower LTV signals lower risk for the lender, and enables lower rates. Putting at least 20% down is advisable to get below an 80% LTV.

Debt-to-Income Ratio

Lenders look at your total monthly debts divided by gross monthly income. The lower your DTI, the better, as it shows you can comfortably handle the new construction loan payment. Aim for a DTI below 43%.

Builder Reputation

Working with a builder that the lender knows and trusts can provide better rate options. Unproven builders are seen as higher risk. Established local builders with industry connections often lead to better loan terms from lenders.

Loan Program

Government loan programs like FHA, VA, and USDA loans have better rates than conventional loans in many cases. Down payment and credit requirements factor in, but they are worth exploring if eligible.

Interest Rate Type

You can choose between a fixed or adjustable rate loan. Adjustable rate loans are most common for construction projects since they have lower initial rates. But they come with the risk of rising payments when the loan adjusts so factor that in.

Loan Term

Typical construction loan terms are 12, 18, or 24 months. The longer the term, the higher the rates tend to be. Interest rates are lower for shorter 12 month construction loans in most cases.

Comparing Construction Loan Quotes

Once you apply with multiple lenders, you’ll be able to compare loan quotes side-by-side. Here are some key things to look at:

• Interest rate – This will be expressed as a percentage rate, such as “7.25%”. The lower the better.

• APR – The Annual Percentage Rate reflects the true cost including fees. Use it to compare overall cost.

• Points – Points allow you to buy down the rate by paying more upfront. Each point typically reduces your rate by 0.25%.

• Fees – Look at origination fees and other charges tied to the loan. Lower is better.

• Loan term – Shorter 12 month terms often have lower rates. But consider project timeline.

• Payment stability – Fixed rates have stable payments. Adjustable rates change over time based on an index.

To make an accurate comparison, ask lenders to provide a detailed Loan Estimate for your scenario. This standardizes quotes across lenders and allows you to truly compare apples-to-apples.

Finding the Best Fit

As you can see, construction loan rates can vary widely based on your financial profile, the lender, and market conditions. The most important thing is to shop different options and find the right fit based on your priorities:

• If you want payment stability, opt for a fixed rate loan.

• If you want lower initial payments, choose an adjustable rate loan.

• If you value flexibility, pick a lender that allows you to lock your rate when desired.

• If you have an uneven financial profile, find a lender that looks at you holistically.

The construction lending market is competitive – be sure to take advantage by getting multiple quotes. This allows you to find the ideal balance of low rates, reasonable fees, and a lender you trust. With the right construction loan, you can build your Arkansas home with confidence.