Homeowners May Want to Refinance While Rates Are Low
Home Equity and 401(k) Loans
Finally, if you have sufficient equity in your home, you might consider borrowing against it to pay for your land purchase. The advantages here are clear. Home equity loans are fairly easy to obtain (assuming, of course, that your credit is in decent shape and your mortgage payments have been handled responsibly). Home equity lines of credit also carry fairly low interest rates, and very favorable repayment terms. Depending on the cost of the land you are planning to purchase, this can be an ideal solution.
Using the assets in your 401(k) to buy land may be an option, but only if your employer is willing to allow you to borrow money from the company’s retirement plan. There is no law requiring employers to allow employees to borrow from their existing 401(k), so this option may not be available to everyone. It’s worth noting, however, that even if you are authorized to borrow against your 401(k) you will only have access to a limited short term loan. Depending on the cost of the land you want to purchase, this may or may not be sufficient. Having said that, borrowing against your retirement savings can be a lower cost alternative to traditional financing.
Land loans are typically more difficult to obtain than other secured loans, but any challenges to your loan application can be overcome if you have a definite plan in place to improve the land and increase its value as an investment opportunity for your lender.
As with any loan, you should be prepared to shop around for the best options, and take the necessary time to secure the best deal possible. Because land loans are considered riskier investments, they often come with more restrictive terms and conditions, so it is doubly important to understand your current financial status and to have a plan in place to repay the debt on time and in full. Borrowers have very little wiggle room when it comes to land loans, and it pays to think a few steps ahead. As always, before signing any contracts be certain that you fully understand the terms and conditions of your loan, and your responsibilities as a debtor.
The Federal Reserve has hinted they are likely to taper their bond buying program later this year. Lock in today’s low rates and save on your loan.
Find Out What You Qualify For
Finally, lenders are also interested in how you’re going to utilize the land itself. Do you have plans in place to further improve the land, bringing it up to local codes and preparing it for construction? Are you planning to build on the land immediately, or will you be holding onto the parcel as an investment property? These are important points to consider, because they can greatly impact your ability to get a loan written at favorable terms. If you are planning to build on the land immediately, and you have construction plans in place, you are more likely to be approved by a lender. Moreover, you may qualify for a construction-to-permanent loan covering both the purchase of the land and the building project.
Also called a ‘deed of trust‘, in this option the seller will issue a deed to the buyer in return for a promissory and mortgage contract. The promissory note guarantees payment to the seller, and the mortgage acts as collateral against the promissory note. The benefit here is that the buyer has immediate access to the land, so you begin construction as soon as you’re ready. The downside is that you will have to negotiate with a third party lender to establish the mortgage. However, having a building project in motion should make it easier to secure a mortgage to back up your promissory note.