Hey Friends. Below is an article I wrote recently for a local magazine. It's the short and sweet of home construction lending. If you're in the need for an interim construction loan, shoot me a message or give me a call (512-203-5869). I do these and lot loans (up to 40 acres) all over the state.
Trey
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Home Construction Financing
Buying a home is exciting. Building your dream home even more so! If building a home might be in the cards at some point, let’s “talk”.
The type of builder you choose will dictate your financing options. With a neighborhood-type production builder, the transaction works much the same as a purchase: preapproval for financing, sign a contract and put down earnest money. Upon completion, the home is purchased from the builder, the same as buying an existing home. These builders are typically affiliated with a mortgage lender and will offer incentives to utilize their lender. However, you should still do your due diligence, comparing their terms to another mortgage company. There is the chance your chosen lender can provide a loan with better terms for you. In addition, if it appears you are leaning towards an “outside” lender, they may offer you much more. Keep’em honest!
Building a custom home is a different game. In this case, you work with a bank to secure a construction loan that pays for the project as you go, similar to a line of credit used as different stages of construction are completed. Termed an “interim construction loan,” it is typically interest-only with the monthly payment calculated on the amount utilized to that point. Upon completion, the interim loan is refinanced into a traditional, fixed rate mortgage. Thus you have two closings and two rounds of closing costs. Additionally, while you know the interest rate of the construction loan up front, you can only guess the prevailing rate when time to refinance. With rates trending up, this can be dicey.
Some banks offer an additional product – a “one time close” (OTC). In this case, the interest rate on the construction loan is the same interest rate locked-in for a known time frame, usually five or seven years. However, nothing prevents changing your mind and refinancing into a traditional, fixed rate mortgage. The OTC becomes insurance of sorts, hedging against rising interest rates or even an unexpected life change that could leave you unqualified for the permanent loan. With an OTC, you also save on closing costs.
It is definitely in your best interest to shop different banks for your custom home build. Terms for an interim construction loan are all over the board. Both origination fees and available interest rates can vary significantly. Some lenders require 25% down payment, while others are as low as 10%.
Advice? Make sure you know and understand all your loan options, the terms of each, and that your lender has all available tools in the bag. Oh, and put the water heater downstairs!
Trey Powers is a senior mortgage loan officer with City Bank Mortgage, a Texas-owned, Texas-based lender. In both 2017 and 2018 he was voted Dripping Springs' Best Mortgage lender. He can be contacted by email: trey@treypowers.com or phone: 512-203-5869. NMLS #1294913.
Trey
__________________________________________________ ________________
Home Construction Financing
Buying a home is exciting. Building your dream home even more so! If building a home might be in the cards at some point, let’s “talk”.
The type of builder you choose will dictate your financing options. With a neighborhood-type production builder, the transaction works much the same as a purchase: preapproval for financing, sign a contract and put down earnest money. Upon completion, the home is purchased from the builder, the same as buying an existing home. These builders are typically affiliated with a mortgage lender and will offer incentives to utilize their lender. However, you should still do your due diligence, comparing their terms to another mortgage company. There is the chance your chosen lender can provide a loan with better terms for you. In addition, if it appears you are leaning towards an “outside” lender, they may offer you much more. Keep’em honest!
Building a custom home is a different game. In this case, you work with a bank to secure a construction loan that pays for the project as you go, similar to a line of credit used as different stages of construction are completed. Termed an “interim construction loan,” it is typically interest-only with the monthly payment calculated on the amount utilized to that point. Upon completion, the interim loan is refinanced into a traditional, fixed rate mortgage. Thus you have two closings and two rounds of closing costs. Additionally, while you know the interest rate of the construction loan up front, you can only guess the prevailing rate when time to refinance. With rates trending up, this can be dicey.
Some banks offer an additional product – a “one time close” (OTC). In this case, the interest rate on the construction loan is the same interest rate locked-in for a known time frame, usually five or seven years. However, nothing prevents changing your mind and refinancing into a traditional, fixed rate mortgage. The OTC becomes insurance of sorts, hedging against rising interest rates or even an unexpected life change that could leave you unqualified for the permanent loan. With an OTC, you also save on closing costs.
It is definitely in your best interest to shop different banks for your custom home build. Terms for an interim construction loan are all over the board. Both origination fees and available interest rates can vary significantly. Some lenders require 25% down payment, while others are as low as 10%.
Advice? Make sure you know and understand all your loan options, the terms of each, and that your lender has all available tools in the bag. Oh, and put the water heater downstairs!
Trey Powers is a senior mortgage loan officer with City Bank Mortgage, a Texas-owned, Texas-based lender. In both 2017 and 2018 he was voted Dripping Springs' Best Mortgage lender. He can be contacted by email: trey@treypowers.com or phone: 512-203-5869. NMLS #1294913.
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