InvestingMarkets & Economy

When should your new-build client lock in the mortgage rate?

Use Cheops' Law: 'Nothing is built on time or within budget'
  • 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.

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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 complet...