- All mortgage lenders have an array of options to lock long-term rates, but these collapse if the house isn't finished on time.
- It's easiest to estimate the completion date the closer the house comes to being finished. The most uncertain period is the middle of construction, not the beginning.
- The appraiser is the one who decides when the house is "complete."
- Most houses are done 60 days after the sheetrockers show up and 45 after they finish -- use a 90-day lock when they arrive, and 60 when they're done.
- If rates spike, retreat to a lower-rate adjustable-rate loan and expect to refinance.
Archaeologists at last found the tomb entrance to the Great Pyramid at Giza, built by pharaoh Cheops in about 2500 BC.
In the tomb in clear hieroglyphics, there it was! Cheops’ Law, governing all construction then and since: “Nothing is built on time or within budget.”
It looks as though we’ve entered a period of rising interest rates, possibly sustained, and Cheops’ Law is helpful to those trying to find a way to limit interest-rate risk while building new homes.
Mortgage options and construction
All mortgage lenders have a numbing array of options to lock long-term rates:
- With up-front and forfeitable fees (cheaper rate)
- Without fees (higher rate)
- With or without a “float-down” option to reduce the locked rate if market rates fall (always with fish hooks: “…re-lock within 15 days of closing to the then-current 60-day rate…”).
All of these schemes collapse if the house is not completed on time, the rate and/or fee gone.
Estimating completion dates
Where does Cheops come in? It sounds perfectly obvious, but the closer a house is to being done, the more reliable the estimated date of completion.
Not at all obvious: The most uncertain period is the middle of construction, not the beginning.
Digging the hole, pouring the foundation, slapping on the sill plate and framing — all of that happens in a predictable blaze.
But in the middle of the process, construction is dependent on sequencing and availability of expensive and scarce sub-contractors — electricians, plumbers and HVAC techs.
It is routine to visit your new house after framing and find that nothing has happened for a month because the electrician is two jobs behind.
This uncertainty forces padding of any long-term lock.
If you think “complete in 90 days,” you must use at least a 120-day lock, and better 150. The farther out, the more padding, which means the more expensive the rate.
Get your builder to agree to a late-completion penalty? Good luck with that!
What’s complete?
Another completion problem: What is “complete?” Who decides? The appraiser, who comes back when you or the builder says, “Done!”
Post-Bubble, the appraiser must photograph every interior room and every angle of the outside to prove: done. That completion inspection goes better if your lender arranges a chat with the builder during the initial valuation.
Another hint: floor coverings must be down. If you’re going to use specialized materials, order them early — no exceptions for the tile on a ship just now passing Sicily.
One helpful thought: Cheops’ Corollary, The Law of Sheetrock.
Most houses are done 60 days after the ‘rockers show up and 45 after they finish — use a 90-day lock when they arrive, and 60 when they’re done.
Sheetrock is crucial to timing because you can’t hang it until all of the expensive subs are done inside the walls. Post-sheetrock, casual labor can do most of the finish detail.
What to do?
More bad news. Your lender prices-out typical long-term locks. You study them and shriek, “Well, hell — these rates are as high as they might go, anyway!”
Right. Money is not free. Anyone taking your risk prices the risk as it is.
Better than the illusion of long-lock protection, and its expense, and many months of completion anxiety, go naked. Un-locked.
If rates spike, retreat to a lower-rate adjustable-rate loan and expect to refinance. The sharper any spike, the greater and sooner the chance for a subsequent drop.
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.
