If you have the monies to build without a loan.....that's a no brainer.....Whatever you borrow you immediately start paying interest. Why pay interest if you already have the money? The only way that would benefit you is if you can invest the money and be guaranteed the interest you earn is higher than what you are paying for the loan! The 'guaranteed' part is the kicker.

Kate, a lot of times, the banks have strict controls on releasing the money and they have their own inspection to confirm that construction milestones are met. This gives you an added control, and might avoid scenarios where the contractor twists your arm to get money before finishing the work. Of course, the inspection is for "completion" and there is no quality control as such.

All this comes at a price, of course, being that you pay them interest. In my opinion, it is still not a bad deal.

I think that the argument of getting a construction loan simply for the sake of getting extra inspections is not well thought out. If you want extra inspections, hire a construction consultant who works for you and looks out for your interests. The bank's inspector works for the bank. Having the bank's inspector, if he or she is competent, is a nice side benefit, but not a primary reason for taking out a loan.

One more powerful argument I've heard is that you don't want to tie up all your liquid assets in an illiquid asset like a house. There is a school of thought that says build the house with the loan, live in it for a while, then pay it off when you are sure you are comfortable living with its operating expenses and have gotten all the new furniture a new house always seems to require.

I voiced my personal opinion on the similar previous thread. Having cash is a powerful motivator for paying quality subs quickly and opens up avenues for cash discounts if you are so inclined. That only works if you can tell what quality work looks like or have a camera and post pictures here for our esteemed panel of experts.

I agree with klabio -- you can get real quality subs by paying the day the work is finished. We did get a construction loan for some of the work, but also paid some of it out of money we had set aside. Our builder was the one who checked the quality of the work and we only paid them when he said it was OK.

I think that as long as you aren't cutting your available cash on hand too low, pay for as much as you feel comfortable with and get a construction loan for the remainder.

kate

what will you do if the house costs more than the cash you have? having a small loan would allow you to finish the project without any delays (if you find out during the build that you need more money - you might have to stop or slow down the build while the loan is being processed.) Even if you got a bank loan, you wouldn't have to draw on the bank money until you needed it. And there might be a tax advantage to having a small mortgage - even if you really don't need one to finance the build - check with a tax accountant. I also like the idea of having some cash reserves on hand after you are done - cash is king. There are a lot of things you will want for your new home, and having cash to pay for it - rather than borrow it on a credit card - is a less costly way to go. Think about it - the bank money is relatively cheap money (say 5.75 to 7%) while credit cards charge 2 to 3 times that or more.

If you have more than enough cash, and you don't want a mortgage, then you can forget the bank. You would eliminate all of the closing costs and fees which can be significant. Nothing wrong with this approach.

If you do choose to borrow some money, the inspections that the bank does for approval of draw payments are not detailed and typically do not check quality. You can hire your own home inspector if you want an independent check on the quality of the work. If you self finance - then having your own home inspector is a must.

best of luck with your project.

Based on the experience of friends, it is harder to obtain a construction loan on a project that is already underway. Banks tend to want to be involved from the get go.

You don't have to use all of the loan, as you only pay interest on the portion that you borrow. It may be a nice sense of security to have the money available to you for any of the unexpected situations that DO arise. (Kind of like a HELOC) You do of course have to consider closing costs.

If you have the money, I wouldn't get a construction loan on the basis of closing costs alone. The equivalent of burning money and throwing the ash out the window. Thousands and thousands of it, no less.

And then the hassle of dealing with big momma, the bank. Sorry, but I am an adult and I don't need supervision from the entity that loans money to me.

My experience (limited) is that a construction loan will cost you 1% up front as ~part~ of the closing costs. So, it's not just paying for what you use, there's a good chunk of change spent up front.

We did not get a construction loan and I do not see any benefit in getting a construction loan if you don't need it. If you want help with the draws, you can hire a title company to handle the draws for you which will be cheaper than a loan would cost you. You can also hire your own inspector to inspect the premises before you make a progress payment to make sure that the work was done and done properly. If you don't have a bank or title company involved, then you will want to obtain lien waivers from workmen and materialmen yourself before you make payments. Are you the general contractor or are you using a builder? If you are acting as your own general contractor, remember that you need to keep track of what you spend on the house so that you can establish its "cost basis" for tax purposes. An easy way of doing this is to establish a checking account that you use only to pay for construction costs, but you still need to save your receipts too. If you are using a builder, than your cost basis will be the contract price with the builder (plus items that you handled outside of the builder's contract, if any). Good luck!

NO, for all the excellent reasons explained above.

If you want equity out of your home--preferably for investment, not expenditure--wait till it's completed, when you'll get the rest rates and terms.

"If you have more than enough cash, and you don't want a mortgage, then you can forget the bank. You would eliminate all of the closing costs and fees which can be significant. Nothing wrong with this approach."

Precisely. We built with cash and could not have been happier with the building process. No worries about draws or application & closing costs and we were able to negotiate cash discounts. In our case this was the best use of our money since the house became part of our well diversified portfolio and we have more than enough other liquid assets.

Also there is a nice feeling of living in a house you completely own.

C