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Understanding Log Home Economics

A realistic (yet still optimistic) look at the current state of borrowing money for your dream home.

Written by Adam Headley


 Photo Credit: @Pormezz / Adobe Stock


Current economic conditions weigh on every financial decision, and these days the economy certainly is making headlines. Words like “inflation” or “rising interest rates” can make prospective log homeowners cringe. Right along with those concerns are “supply chain issues” or “shortages of materials and labor.”

It’s enough to rain on your log home parade, but don’t run for cover quite yet. These issues can be worrisome, but if they’re understood, they can be taken in stride. The search for the right loan to help finance your log home dream is still well worth the investment of time and energy, so, let’s take a look and what’s happening in the marketplace.


There’s Money to Be Had

“Banks have money to lend, and they’re looking for good loans all the time,” comments Sam Jones, chief lending and chief credit officer of Millennium Bank in Chattanooga, Tennessee. “We are working with borrowers who have seen interest rates rise while their log homes are under construction. There’s more risk of cost overruns when the prices of materials increase or a borrowing interest rate is higher than anticipated on a permanent mortgage loan due to the Fed’s efforts to curb inflation.”

No doubt, recent inflation has caused a commotion, but few people understand what inflation really means. The classic definition of inflation is “too much money chasing too few goods.” 

Right now, there’s plenty of cash in the hands of the private sector. During the COVID-19 pandemic, people saved money that they otherwise might have spent on vacations or large purchases of durable goods, like homes and cars. Government stimulus plans also have pumped money into the economy, so, there’s plenty of cash sitting in banks.

In regard to the “goods” portion of the inflation equation, the supply side has suffered from several factors. The pandemic created shutdowns in factories that produce finished goods. It also hampered the availability of raw materials such as timber and steel. It takes time to “rev up” the production engine as people have returned to work slowly or opted out of the workforce altogether, making job openings tougher to fill than they once were.

Making the situation even more critical is that pent-up demand for housing has unleashed due both to the pandemic and the Millennial generation entering the housing market. Prices have risen due to the relative scarcity of commodities ranging from washing machines to single-family homes.

There, in a nutshell, is the result of “too much money chasing too few goods.” Combined, these factors result in rising prices, and that includes the cost of money via higher interest rates. 


The Effect of Rising Interest Rates

When news reports mention that the Fed has increased interest rates, they’re referring to the Federal Open Market Committee, a branch of the Federal Reserve, which is responsible for U.S. monetary policy and taking action to slow inflation. Higher interest rates slow the demand for goods and services by making them more expensive, theoretically allowing the supply side to catch up. When supply and demand are (more or less) in balance, the result is price and interest rate stability. And while the Fed has no real control over the supply chain, it can and does exert influence over demand through raising or lowering interest rates, affecting the cost to borrow money.

So, when it’s time to think about buying or building a log home, consider your budget and the amount of money that must be borrowed to become the proud owner of that dream home. Borrowing will cost more than it did in the recent past, but the good news is that banks are still in the business of lending. With plenty of money available to fund loans, bankers are eager to put their cash to work. 


Choosing the Right Lender and Loan

“Your banker should be a trusted advisor,” Sam says. “It’s important to establish a strong working relationship with an experienced banker so that the process of buying or building a log home is smoother.” 

In the current economy, this is especially important. A banker can easily help with the monthly payment calculation, and they can even get borrowers prequalified for a certain loan amount before discussions with builders and log home providers begin. Knowledge is power, and understanding the cost associated with borrowing removes a lot of unnecessary worry. 

“Also, remember that credit scores do impact interest rates, so using credit wisely and making payments on time will help borrowers get the best available rate,” advises Sam.

With a banking relationship in hand, take a look at your anticipated loan amount and then use an amortization calculator to evaluate the monthly payment of principal and interest at a certain interest rate over a period of time, typically 15 or 30 years. Amortization schedules are easy to find online and simple to use. In fact, your bank may provide one on its website. 

Having some idea of the monthly payment will allow you to make choices. Can your budget handle the amount you want or need? If not, try a lower loan amount. Changes may be necessary, but information is the key. Decisions can then be made concerning those features of the log home that are “must haves” versus those that would be “nice” if they are affordable.

With a construction loan, borrowers generally pay interest only until the home is complete. The permanent loan (i.e., mortgage) then initiates the principal plus interest payment schedule.

A word of caution when it comes to construction today: Check with your log home provider of choice and make sure the desired materials are available or will be available in a timely manner. The availability of building materials will dictate the construction schedule, and sometimes shortages will generate delays in the process. In some cases, certain items like windows, doors or flooring may be backordered. Be mentally prepared for a longer construction process than you might wish for, and know the finished product will be well worth the wait.

So yes, rates have risen, but plans to buy or build that longed-for log home may still move forward. Taking the necessary time to place the process in financial perspective will make the experience less stressful and more achievable.


Getting the Green Light for Greenbacks

What do you need to successfully borrow money from a lending institution? Credit criteria usually include the following:

  • Credit score and payment history (good credit scores are usually considered above 650).
  • Cash or real estate equity position; usually 10 to 20% is required.
  • Time on the job; two years with the same employer or a continuous history in the same field are positive.
  • Debt-to-income ratio; typically two ratios are evaluated. One of these is the monthly home mortgage payment alone at 25% or less of monthly income. The second is total monthly debt payments at 35 to 45% of monthly income.
  • Source of any cash down payment. If a gift is involved, a letter describing the details must be provided by the borrower. The gift is not expected to be repaid to the giver.
  • A letter of explanation may assist in the approval process if any derogatory credit history is discovered.


The Prospective Borrower’s Tool Kit  

Have these items available when it’s time to apply for log home financing:

  • Current personal financial statement
  • Two most recent years personal tax returns (complete with schedules)
  • Final blueprints/house plans
  • Construction cost estimate
  • Construction contract (if available)
  • Verification of available cash (bank or brokerage statements)
  • Your credit score
  • Sales contract (if applicable)

See Also: Financing the Future

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