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Building a Home

Construction to perm really dumb question

13 years ago

This may be the dumbest question ever asked on this board, and I've tried to find an answer elsewhere short of asking a mortgage loan officer, but I hear that in a construction-to-permanent mortgage loan, during construction we pay interest only. My dumb question is: is that interest applied to my mortgage at conversion time? Please be kind, folks. I'm learning...

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Comments (10)

athensmomof3
13 years ago
No :) Just interest on the money you have drawn from the construction loan. . . We are actually waiting to draw on the loan as long as we can and paying out of pocket so far for just that reason!
nini804
13 years ago
You mean instead of paying it as the house is being constructed? That's not a dumb question....I was totally confused about that as well. In the case of our loan, and I imagine most, the interest is paid on the money that the bank is giving the builder as he draws it. I was wondering why my husband was so keen on making sure that the first draws were paid with cash that was left over from the proceed of the sale of our house, before dipping into the loan...now I know. Those interest payments keep getting bigger and bigger each month...I really want my house finished quick!! I also asked why we just couldn't pay the interest at the end with the mortgage, but apparently our loan isn't set up that way. Stinks...and makes me think that building is WAYYY more expensive than buying an already built home. I wish we could have bought the house we are building SPEC! ;) ('Course, then it wouldn't be anything like what we want, so I guess that is the trade-off!)
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wkate640
Original Author
13 years ago
Thanks athensmom. Nini804 I meant how is the interest we pay during the construction loan applied, if it is applied to us at all? It sounds as if the interest we pay during construction is pure profit for the bank? Nothing is credited to us?
jzinckgra
13 years ago
Using proceeds from sold house first makes a lot of sense and we'll certainly do that. thanks for the tip.. BTW, what's everyone's construction loan terms. Here's what we are being offered, which is much better than our local banks.

1. 5% interest
2. 10 months to build
3. 90% LTV, unless >$417,000
4. $395 appraisal
5. 2-3 weeks to close. This is huge since our local bank was 45-60 days.
nanj
13 years ago
The interest you pay on the construction loan is how the bank makes money. They lend you money and for doing that, you pay them interest. Think of it like a car loan. You need a lot of money and don't have it, the bank has a lot of money and wants to make more so they say, we'll give you the money you need but for our risk, you have to pay us back the principle and more (the interest).

So essentially, yes, the interest you pay on your construction loan is the bank's profit. The same thing applies to your mortgage interest - profit for the bank. I'm no fan of banks, but if they didn't charge interest for letting you use their money, they couldn't stay in business very long.
wkate640
Original Author
13 years ago
We'll pay quite a bit out of pocket then. However, there must be a point at which it makes sense to have a mortgage in terms of using the interest as an income tax deduction. I'm just not smart enough to figure that out myself.
umsteadrunner
13 years ago
Our credit union is doing 3.625% for 12 months + .75% origination fee + $400 appraisal fee, one time close
30 days to close
jmagill_zn4
13 years ago
A mortgage is a set payment that pays on the interest and principal monthly.

A construction loan is interest only because you only draw the money as you spend it. That borrowed amount grows until you have borrowed you maximum and hopefully have finished the house at the same time.

The bank will not roll it into a mortgage until the house is finished and appraises for an amount that they deem necessary to meet the terms of your loan.
gooddogs74
13 years ago
jzinckgra

Might I ask who is offering those terms? Getting ready to try to find a loan hopefully in the next month or so and am already fearing the worst with regards to having to make up the difference between the cost to build and the appraisal!
brickeyee
13 years ago
Construction loans often have NO payments, so the interest is added to the balance (the cash the bank has payed out on your behalf) every month.

At the end of the construction you either pay off the entire loan balance, or borrow again (a mortgage) to pay off the construction loan.

Until the loan is re-cast as a mortgage, the interest deduct-ability is not clear.

I have seen CPAs try figure out ways to turn a portion of the principle repayment back into deductible interest, but would not care to fight that one with the IRS.

It very well could hinge on the fact that a house under construction is not a residence yet.

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