Thinking about buying a piece of land? Whether you're dreaming of building a custom home, starting a small farm, or holding the land as an investment, a land loan can help make it happen. But before you start scouting your perfect plot, there’s one big question to answer: what’s the interest rate on a land loan?
Land Loan Rates vs. Traditional Mortgage Rates
In general, interest rates for land loans tend to be higher than those for traditional home loans. Why? It all comes down to risk. Lenders consider land loans riskier because there’s no home or structure as collateral, just the land itself. That means if a borrower defaults, the lender may have a harder time recouping their money.
How Rates Vary Depending on the Land
Not all land loans are the same, and the type of land you’re purchasing plays a big role in what kind of rate you might get. Raw land is considered the riskiest, due to being without utilities or road access. Because of that, rates for raw land loans are often on the higher end of the spectrum.
Then there’s unimproved land, which might have limited access to utilities but still isn’t ready for construction. Loans for this type of land usually fall somewhere in the middle range when it comes to interest.
On the least risky, improved land comes ready with features like road access, water, and electricity. Lenders often view these properties as more secure investments, so the interest rates tend to be lower than those for raw or unimproved land.
Factors That Influence Your Land Loan Rate
Several factors can influence the rate you're offered. Your credit score plays a significant role, as does the size of your down payment. Land loans require larger down payments than traditional mortgages, sometimes between 20% and 50%, which can impact your rate. The loan term, lender specific policies, and even the location and zoning of the property are also taken into account. With many variables are in play, interest rates can vary, often ranging anywhere from 5% to 10% or more.
Where to Start
If you’re considering purchasing land, the best place to start is by speaking with a local lender who knows your area. They can guide you through zoning rules, development, and explore financing options tailored to your goals.
And while it’s easy to get stuck on numbers, interest rates are just one part of the equation when it comes to deciding whether a land loan is right for you. For many buyers, the flexibility and future potential of owning land outweigh the slightly higher cost of borrowing.
In our next post, we'll explore why land loans are worth considering, even with slightly higher rates. Stay tuned to learn how the flexibility, investment potential, and long term value can make them a smart move for you.
