When you’ve decided you want to build your very own home instead of buying an existing one, you have more choices than you might imagine. It can be an exciting process to work with your architect or pick out plans you choose from a multitude of options from wood flooring to tile to appliances to the number of bedrooms. But you also have another, perhaps not as exciting an option, how to finance your new construction. You have two primary choices: a one-time-close loan and a construct-to-perm loan.
Two Main Options to Finance New Construction
1. Construct-to-Permanent Loan
A Construct-to-Perm loan is actually two different loans, a construction loan and a permanent loan. The permanent loan is any standard mortgage and the construction loan is short term. Let’s say you and your builder have determined you’ll need $300,000 for materials and labor to build on a lot you own that will be worth more than $400,000 when completed. You apply for a construction loan at a bank that will review the plans and specifications, order a property appraisal and ultimately approve the request.
Instead of just handing over $300,000 to your builder the bank will issue funds in increments based upon a percentage of completed work. For instance, the first 10% or $30,000 might go toward site work, fees and permits. The next 20% for foundation work, and so on. At each juncture the bank orders a property inspection confirming the work has been completed and time to move onto the next phase.
As the home construction progresses the borrowers apply for a permanent mortgage. At the end of construction, the bank orders a final inspection to certify the property is ready for occupancy. The mortgage company then pays the bank the construction loan and funds the permanent mortgage.
2. One-Time-Close Loan
A One-Time-Close loan is what its name implies and is a loan that covers both the construction costs as well as readying permanent mortgage at the end of construction term. At first glance, it seems easier to apply for a one-time-close loan if for nothing more than the reduced paperwork involved compared to applying for two mortgage loans. In addition, because there is only one closing there is only one set of closing costs.
Choosing the Best Fit
With a construct-to-perm loan, there are two loans and two different closings but the closing costs don’t necessarily double because of the two loans. There will be more costs involved because there are two closings. Further, the terms with a one-time-close are set within the original note and borrowers can lock in current interest rates. With a construct-to-perm loan borrowers are subject to prevailing rates should rates in general begin to rise over the course of construction.
I can run the numbers for you and answer all the questions you have and present the pros and cons of each. All you need to do is set up some time to meet with me to discuss these options and which would be better for your financial situation.