If you’re looking to buy a piece of land, you might be wondering if a “land mortgage” is the same as a home mortgage.  If so, this blog post will help you learn about land mortgage rates so that you can differentiate between the two. That said, here’s a breakdown of the key differences between the two types of mortgages. Read on to learn more.

The Difference Between A Land Loan And A Home Loan

Mortgage companies perceive land loans to be riskier because:

  • A mortgage company requires a larger down payment for land purchase than they typically require for an owner-occupied home.  
  • You will be charged higher interest rates for a land loan than you typically pay for a home mortgage.
  • The length of a land mortgage is capped at 15 years and is generally shorter than a traditional home mortgage that can go up to 30 years.
  • Land loans are, on average, more expensive than home loans.

Comparison Of Home Loans And Land Loans

Both land and home lenders generally:

  • Require a mortgage on the property. The mortgage secures the loan and gives the lender a legal right to foreclose if you don’t make your payments.
  • Offer both fixed-rate and adjustable-rate mortgages.

Why Are Land Loans Considered To Be High-Risk Financial Products?

 Financial institutions consider land loans to be high-risk because:

There is no structure or dwelling on the land, so if the loanee was to experience financial difficulty in servicing the loan, their priority would go to servicing expenses like their rent or the mortgage on their home first, before the land loan. It’s no wonder that banks and other lenders perceive land loans as a higher-risk product than mortgages for owner-occupied homes.

How Much Does A Downpayment On A Land Loan Typically Cost? How Long Is The Loan Term?

Due to the higher risks associated with land loans, most banks and mortgage companies require a larger down payment when compared to an owner-occupied home. A typical minimum down payment for a land loan is 20%. In addition, the loan duration for a land mortgage is usually capped at 15 years, while traditional mortgages can last up to 30 years.

Is It Possible To Use Any Current Equity In The Land I Already Own Toward Down Payment And Closing Costs?

Of course, if you already own land and have equity in it, you can use that equity to help finance the purchase of additional land. The amount of loan you can access will depend on the lender and the current market value of the equity on your property.

Is It More Cost-Effective To Purchase Land And Construct A Home?

It is usually not cost-effective to purchase land and build a house for many reasons. One is the higher interest rates and down payment requirements for land loans. Since it may take between 6 months to a year to get the necessary permits, acquire the land and build a house, you will be paying rent for your current dwelling while still servicing the land mortgage for the duration of the construction period. So it is more cost-effective to purchase a home that is already built that comes with a low down payment and interest rates.

Secondly, you need to factor in the additional costs of architectural plans, building permits, and labor costs for constructing the house. You will also need to pay for inspections during construction. Unfortunately, these costs may not be factored in during the valuation of the property if you want to sell it in the future.

Is It Possible To Buy Land And Build A House With The Same Loan?

Of course, you can. You will just need to work with a lender who offers construction to permanent loans. These loans are designed for people who want to purchase land and build a home within a specific time frame. The loan will cover purchasing the land, building the house, and even furnishing it. You will just need to ensure that the property is appraised at the correct value when you take out the loan. Some of the items you will need to qualify for a construction to permanent loan include:

  • Building plans for your home.
  • Completing all necessary paperwork such as construction contracts and deeds related to the property purchase before you sign on the dotted line.

The risks associated with land loans can be scary for some people, but if you know what you’re doing and have a good financial advisor by your side, these risks won’t be so scary after all. Just remember to factor in all the potential costs involved in this type of purchase and make sure that the property is appraised at the correct value. Buying land and constructing a home can be an excellent investment, so don’t let the risks scare you away!

By Manali

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