New Home Construction Loan Rates in 2023 – What You Need to Know

Building a new home can be an exciting yet challenging process, One of the most important decisions you’ll make is choosing the right construction loan to finance your build, Construction loans help fund the costs to purchase land and build a custom home from the ground up

Understanding current new home construction loan rates can help you budget for your project and choose the best loan option. Rates are rising in 2023 as the Federal Reserve boosts interest rates to fight inflation. But shopping around and having excellent credit can help secure the most competitive rate.

In this article, we’ll explain everything you need to know about new home construction loan rates, including:

• How construction loan rates work
• Factors that influence rates
• Current rate trends
• How to get the best rate
• Types of construction loans
• Construction vs renovation loans
• FAQs

How Do Construction Loan Rates Work?

Construction loans typically come in two forms

Construction-to-permanent loan: This is the most common type of construction financing. The loan covers payments during the building phase, then converts to a traditional fixed-rate mortgage once construction is complete.

Construction-only loan: Also called a bridge loan, this short-term financing covers construction costs but must be paid back within a year or when the home is completed. You’ll need separate permanent financing.

Construction loans carry higher interest rates than traditional mortgages on existing homes. Here are some reasons why:

• Higher risk – With no home yet built as collateral, lenders take on more risk.

• Shorter term – Construction loans may only last 6-12 months. Shorter loan terms often mean higher rates.

• Higher costs – Lenders incur more expenses reviewing plans and making multiple inspection and draw payments.

• Variable rates – Construction loan rates may start out variable and fluctuate during the build.

• Higher fees – Origination fees around 2% are common. There also may be engineer inspection fees.

Once the home is completed, a construction-to-permanent loan converts to a fixed-rate mortgage, often with a lower rate.

What Impacts Construction Loan Rates?

Several factors determine the construction loan rate lenders will offer, including:

• Credit score – In general, borrowers with scores of 740 or higher get the best rates. Many lenders require 680 or higher.

• Down payment – Larger down payments of 20% or more mean lower rates. VA and USDA loans allow 100% financing.

• Loan type – Government-backed FHA loans often have lower rates than conventional loans. Jumbo loans above conforming limits get higher rates.

• Interest rate environment – Rates rise when the Federal Reserve boosts its federal funds rate, as it has been doing.

• Recession risk – Economic uncertainty leads to rate hikes.

• Lender – Each charges different rates based on its own criteria and overhead costs.

• Relationship discounts – Having accounts with a lender may score you a lower rate.

Current Trends in New Home Construction Loan Rates

New home construction loan rates have been climbing in 2023 as the Federal Reserve continues to raise interest rates to fight high inflation.

In January 2023, rates on 30-year fixed construction-to-permanent loans averaged around 7.5% according to Bankrate data. That’s up from average rates closer to 5.5% throughout much of 2021 and the first half of 2022.

Here are sample new home construction loan rates as of January 2023:

Construction-to-Permanent Loan Rates

Term	Rate “As Low As”	APR* “As Low As”
15 Years	6.875%	7.077%
15 Years Jumbo	7.000%	7.083%
20 Years	7.375%	7.540%
30 Years	7.375%	7.503%

Higher rates make financing a new home build more expensive. But experts think construction loan rates are nearing their peak for this rate hike cycle. Once inflation cools, rates should stabilize and possibly decrease.

How to Get the Best Construction Loan Rate

Though rates are rising overall, you can take steps to secure the most competitive new home construction loan rate:

• Get quotes from multiple lenders – Compare rates and fees to pit lenders against each other. Local banks and credit unions may offer relationship discounts.

• Ask about buydowns – Paying points upfront to buy down the rate can save long-term.

• Improve your credit – Shoot for a minimum score of 740. Pay down debts and resolve errors on your credit reports.

• Make a larger down payment – At least 20% down scores the best terms if you can afford it.

• Lower your DTI – Keep total monthly debt payments under 40% of income.

• Consider government loans – FHA, VA and USDA loans often have lower rates than conventional loans.

• Lock your rate early – Rates tend to rise during construction. Locking in early provides rate protection.

• Watch Fed moves – Monitor rate hike cycles and lock when the Fed pauses to raise rates.

Types of Construction Loans

Beyond construction-to-permanent and construction-only loans, other common construction loan varieties include:

• Owner-builder loans – Designed for owner-acted contractors. Require hands-on construction experience.

• Renovation loans – Fund improvements to existing homes rather than ground-up builds. Often easier to qualify for.

• Land loans – Special financing to purchase and prepare a property for construction.

• Multi-use loans – Single loan provides both construction and permanent financing.

• VA, FHA and USDA loans – Government programs that offer 100% financing and sometimes lower rates.

The best loan type depends on your project, budget, timeline and personal financial profile. A lender can help you choose the optimal option.

Construction Loans vs. Renovation Loans

Though their names sound similar, construction loans and renovation loans key differences:

Purpose

• Construction loans fund ground-up new builds.

• Renovation loans make improvements to existing structures.

Collateral

• Construction loans are secured by the land and improvements.

• Renovation loans are secured by the existing home.

Loan term

• Construction loans are short term, usually 6-12 months.

• Renovation loans have longer terms of 5-30 years.

Interest rates

• Construction loan rates are generally higher.

• Renovation loan rates are closer to rates for traditional mortgages.

Funding

• Construction loans distribute money in phases as work is completed.

• Renovation loans distribute the full amount upfront in a lump sum.

Qualifying

• Construction loans have higher credit score and income requirements.

• Renovation loans are easier to qualify for.

If making updates to a current home, a renovation loan is likely the better fit. For building new from the ground up, a construction loan is optimal.

FAQs About New Home Construction Loan Rates

How are construction loan rates determined?

Construction loan rates depend on the lender, loan type, loan amount, your credit score and debt-to-income ratio, the down payment amount, and current market rates influenced by the economy and Federal Reserve.

Should I get a fixed or adjustable rate construction loan?

Fixed-rate construction loans provide certainty, while adjustable-rate loans sometimes start out lower but carry risk of increasing over the build. Weigh the pros and cons of each when shopping rates.

What is the current average construction loan rate?

As of January 2023, average 30-year fixed construction loan rates are around 7.5%, according to Bankrate. Rates for renovations, land loans and other construction loan varieties differ.

Are construction loan rates higher than mortgage rates?

Yes, construction loan rates are typically 0.5 to 1 percentage point higher than rates for traditional mortgages on existing homes. Shorter terms and higher lender risk increase construction loan rates.

How often do construction loan rates change?

Construction loan rates can fluctuate daily or weekly as lenders adjust to market conditions and federal funds rate changes from the Federal Reserve. Rate lock periods allow borrowers to secure a rate for 30 to 180 days or more.

Can I lock in my construction loan rate?

Yes, rate locks are available on construction loans, typically lasting 30 days to 6 months. Locking in early during rate hike cycles helps prevent rising rates from derailing budget predictions.

The Bottom Line

If building a new home is on your radar, pay close attention to current construction loan rates and where experts see them heading. Though rates are rising in 2023, shopping around and using credit boosting strategies can help you land the most competitive financing.