topic Re: Construction loans in Home

Construction loans

151949 — Wed, 07 Jun 2017 05:45:52 GMT

I have been doing some research about these. My My there is a lot to learn. They are very expensive ! There are a lot of variables. We have built 2 homes in the past but both times the builder financed the construction and we just put down our 20% and got a conventional mortgage.The builder we are interested in now does not do this. They require you to finance the construction.

Construction loans require you pay the interest while the construction is going on - the builder we like takes 10 months to complete a home so you would pay about $24,000 in interest (or more) over that period. That is money down the drain.

Also there are 2 ways to do it - one way you get the construction loan for 4.1% and you pay the closing costs - then when the house is complete you get another conventional mortgage and have to pay closing costs again.So that's another $20,000 more or less down the drain. The other type is you get a construction loan that converts to a convential loan at completion of building so you only have to pay closing costs once - but the interest rates are higher over the entire term of the loan.

My DH & I are thinking this is just not really the best choice for us , no matter how much we love the house. They do build spec homes at this place but if you go that route you won't get to pick your colors etc. However, the spec homes all you do is get a convential mortgage where you put 20% down, & it's luck of the draw if they will have one available when we are wanting to buy.

I never had any idea financing the building of a new home could be this complicated.

Re: Construction loans

Kachina624 — Wed, 07 Jun 2017 07:07:10 GMT

@151949 Are you thinking of leaving your cozy Florida home and moving elsewhere? Sounds like it could be a financial disaster based on what you wrote. That $24,000 in interest would be enough to deter most people.

Re: Construction loans

AuntG — Wed, 07 Jun 2017 10:11:42 GMT

When I see that much money going down the drain just for the privilege to build a new home, I'd look for an almost new home that met most of my requirements. Or, I would reevaluate whether a change is necessary. If you like your neighborhood, maybe staying put is the most sensible thing to do.

Re: Construction loans

151949 — Wed, 07 Jun 2017 12:37:09 GMT

@Kachina624 Honestly, I told my DH that I must be misunderstanding this - who would just throw away this much money? But he read it as well and he understood it exactly the same as I did. Clearly, we need to go to the bank when we get back in the fall, and sit down with them & have a conversation.

Re: Construction loans

151949 — Wed, 07 Jun 2017 12:40:31 GMT

@AuntG I think we need to look at different builders in different plans who finance in a more conventional way, as this expense on top of the price of the house is too much. We'd be paying much more than the value of the house.

Re: Construction loans

Carmie — Wed, 07 Jun 2017 12:59:33 GMT

We built out house with a construction loan that converted to a conventional loan when we moved in.

the mortgage company sent out 4 checks made out to the builder and my DH and I over a period of nine months. We all had to endorse the checks.

The first one was sent before ground was broken.

The second one was sent when the house was completely under roof and water tight.

the third one was sent before the finishing materials went in and the forth was sent when the house was completed.

We paid interest only on the money that was actually paid. For example, if you borrow 100 thousand, the first draw would be 25,000. You would only pay insterest on the 25,000 until the next draw was made. Then you pay interest on 50,000 and so forth.

You do not pay principal and interest on the whole amount you want to borrow until the house is completed.

i can't imagine that your interest would be $24,000 over a nine month period. Our payments were quite low while the home was,being built. You might want to get additional indormation from the mortgage company before you proceed by looking for a new builder.

Best of luck.

Re: Construction loans

AuntG — Wed, 07 Jun 2017 13:16:37 GMT

@151949 wrote:
@AuntG I think we need to look at different builders in different plans who finance in a more conventional way, as this expense on top of the price of the house is too much. We'd be paying much more than the value of the house.

I agree and would walk away from this builder.

Re: Construction loans

151949 — Wed, 07 Jun 2017 13:56:10 GMT

@ Carmie - thanks for the input. We have been going along thinking this was exactly as you describe it but then we spoke to the sales lady and she said $64,000 5 times over a 10 month period, at 4.1% interest would be payments of $2475 a month on the interest, to start out.And every time you make a payment to the builder the interest goes up. Of course , if our current house sold in the meantime we would be able to stop that loan and pay cash, but we'd have to rent somewhere. We have pretty much decided this is just too rich for us, much as we loved the house. We were expecting the interest only payments to be a few hundred a month not a few thousand.

Re: Construction loans

Mominohio — Wed, 07 Jun 2017 14:42:14 GMT

I have never wanted to go through the mess and the hassle of a new build. I know a lot of people who have done it, and in my opinion, it simply wasn't worth it.

These kinds of 'fees' would stop me in my tracks. Just think how much all that money would buy in fixing up an existing home to your liking.

I know some people are really particular about not living in something 'used'. I've never understood that idea. Older homes are much better built than anything they will slap together today.

Especially in retirement, I couldn't see 'throwing away' that kind of money.

Re: Construction loans

Allegheny — Wed, 07 Jun 2017 15:26:41 GMT

@Carmie

That is exactly how it worked when we had our home built.

But for us that was 30 years ago and I assume things may have changed somewhat.

We had our builder, but dealt directly with the bank when we went for the construction loan. There were inspections done by the bank before the builder was given a payout. At the end of the process our loan was converted from a construction loan to a mortgage after it passed all inspections. We had one closing.

Re: Construction loans

ccassaday — Wed, 07 Jun 2017 17:09:38 GMT

I think you are misunderstanding. With your payment being just interest it should be very low. Yes the payment will increase as your house progresses but no way should you have paid that much in interest payments unless that includes your down payment. Our construction loan is a one time close at the beginning. The downside is you have to pay extra if you go over. But with a good detailed bid you shouldn't. We had to go to a credit union as our regular bank does not do construction loans.

Re: Construction loans

151949 — Wed, 07 Jun 2017 16:57:57 GMT

This morning my DH spoke to someone at a local bank and she told him they make such a small amount on these construction loans that they don't bother to carry them. She recommended a bank to us. But that certainly makes it sound like what the sales lady told us was incorrect.

Re: Construction loans

ccassaday — Wed, 07 Jun 2017 17:08:05 GMT

You defintly are misunderstanding. My suggestion is find a bank or credit union that does construction loans and sit down with them. My dad went in twice before we signed papers. They will be able to clarify. Interest only should be very small to start but should not exceed 4 or 5 hundred dollars a month. My dad even went over closing costs ect. No way we're closing costs that high. Just as reference our loan will be for about 365k.

Re: Construction loans

Carmie — Wed, 07 Jun 2017 18:56:39 GMT

@151949 wrote:
@ Carmie - thanks for the input. We have been going along thinking this was exactly as you describe it but then we spoke to the sales lady and she said $64,000 5 times over a 10 month period, at 4.1% interest would be payments of $2475 a month on the interest, to start out.And every time you make a payment to the builder the interest goes up. Of course , if our current house sold in the meantime we would be able to stop that loan and pay cash, but we'd have to rent somewhere. We have pretty much decided this is just too rich for us, much as we loved the house. We were expecting the interest only payments to be a few hundred a month not a few thousand.

That isn't right and not even close. Could that be the total interest for the whole 10 month period? That would make more sense.

It would be impossible to incur a $2475 interest payment on $64,000 first draw. Also impossible to incur a $2475 interest payment for the second draw which would be only $128,000 at 4.1% and so on.

The interest on the first draw of $64,000 would be less than $200 a month.

your interest payments would start out very low and go up a little with each draw made.

Somewhere there is a miscommunication between the lender and you. I would schedule an appointment with a construction mortgage lender and they should be able to run a computer print out of your monthly payments on a $320,000 loan with five draws. It would Not be 100% accurate because the draws are dependent on how long it takes to build the house, but will give you a good idea.

The interest alone on a 30 year mortgage for a $320,000 would be only $882.00 a month to start at 4.1%

Re: Construction loans

Tigriss — Wed, 07 Jun 2017 21:55:39 GMT

You should forget building and go into financing. That is ridiculous. WHen you fist wrote, I thought you were looking i Florida, so of course the ginancing is high because it is back to a seller's/builder's market. I would look into buying one that is already built. Consider it recycling a whole home versus dumping one and building yet another home from scratch adding to the crowded market. You are being green and environmentally friendly by purchasing a already built home, and you are saving all that money!

Re: Construction loans

Lucky Charm — Wed, 07 Jun 2017 22:59:49 GMT

What you should/could do is, put your home on the market, if it sells, live in your trailer---no rent (maybe ground rent). When your home sells, take cash in hand and go to your builder.

Re: Construction loans

Carmie — Wed, 07 Jun 2017 23:57:06 GMT

@Lucky Charm wrote:
What you should/could do is, put your home on the market, if it sells, live in your trailer---no rent (maybe ground rent). When your home sells, take cash in hand and go to your builder.

That would work if her settlement and occupancy was befor October 15. The campgrounds in PA close on or about that date. It would also be difficult to live in PA while your home was being built in FL.

She would not be there to keep an eye on things.

When we built, we sold our home and stored most of our belongings in a storage unit and live in a small apartment for almost a year .until the house was built. That made it easy and we had a bunch of cash for a down payment.

i imagine the OP will sell her camper and her home.

Re: Construction loans

ccassaday — Thu, 08 Jun 2017 00:05:20 GMT

@Carmie wrote:
@Lucky Charm wrote:
What you should/could do is, put your home on the market, if it sells, live in your trailer---no rent (maybe ground rent). When your home sells, take cash in hand and go to your builder.
That would work if her settlement and occupancy was befor October 15. The campgrounds in PA close on or about that date. It would also be difficult to live in PA while your home was being built in FL.

She would not be there to keep an eye on things.

When we built, we sold our home and stored most of our belongings in a storage unit and live in a small apartment for almost a year .until the house was built. That made it easy and we had a bunch of cash for a down payment.

i imagine the OP will sell her camper and her home.

My sister built a huge garage last year. It is seperate from their house garage. We have moved everything we can there. We are scheduled to break ground June 19th. Our current house will be up for sale probably the beginning of July. We then have to rent a apartment after it sells. We expect it to sell in a couple of days. We will probably have to rent from Aug until DEC. We were supposed to be completed by nov 16 but have had some delays.

Re: Construction loans

gidgetgh — Thu, 08 Jun 2017 01:00:31 GMT

I can only just speak for me, but I would feel really uncomfortable taking out a construction loan for some builder to build a house I was going to buy. What if he starts the construction and never finishes it? Aren't you out the money then?

If he's a builder he can take out his own construction loan, build the house and then I'll put a contract on it. He'll get his money when the house closes and then he can pay off his loan.

There's just no way I would be his bank and that's what you'd essentially be doing. Again, what if he doesn't finish it. Then what?

Also, 10 months to build a house? That seems really long to me. And you're financing the whole thing.

Way too risky for me.

Re: Construction loans

ECBG — Thu, 08 Jun 2017 01:07:19 GMT

@151949,You only pay interest on the amount of money you draw from the bank, not the total amount of the loan, the rest of which sits in the bank.

I have built two houses and taught this.