With a construction-to-permanent (CTP) loan, your rate is typically not locked during the construction phase. The rate floats until construction is complete and the loan converts to a permanent mortgage.
Here is how rate locks work with CTP loans and what you can do to protect your rate during the build.
Construction Phase: No Lock
During the construction phase of a CTP loan, your rate is not locked. Construction timelines are unpredictable and delays are common. Lenders typically do not offer rate locks for the construction phase because the closing date is uncertain.
Instead, your rate floats with the market during construction. You make interest-only payments on the amount drawn during construction, typically at a variable rate tied to an index like the prime rate.
Permanent Phase: Lock at Completion
When construction is complete, the loan converts to a permanent mortgage. At that point, you can lock your rate. Some lenders allow you to lock up to 60 days before the expected completion date, while others require the conversion to be imminent.
Some CTP loans offer a rate lock commitment at the start of construction, with the lock taking effect when the permanent phase begins. This protects you if rates rise during the build. Ask your lender about this option before starting.
Managing Rate Risk
Because construction can take 6 to 12 months or longer, rate risk is significant. To manage this, some borrowers choose a CTP loan with a longer lock commitment for the permanent phase. Others plan to refinance after conversion if rates have dropped.
Bottom Line
CTP loans do not lock rates during construction. The rate is locked when construction completes and the permanent phase begins. Ask about extended lock commitments to protect against rising rates.
