I'm no expert but based on the fact that mortgage rates are currently at near historic lows and the government is pumping billions of dollars of new money into the economy (all those stimulus package bailouts), I think we're going to start seeing inflation VERY soon - double digit inflation in fact. If so, mortgage loan rates will rise with inflation. My personal suspicion is that your banker also foresees inflation coming and he doesn't want you to lock in today's low rates by getting a one-time close loan because such loans are very tough on the lenders. Your banker may look for the "best rate" available for you when your construction is done, but I strongly suspect that "best rate" won't be nearly as good as what you can lock in right now with a one-time close. Keep in mind that your loan is a business transaction for the bank. The bank wants to make money off of it and your banker has the bank's best interests at heart, not yours. As for possible over-runs in costs, if you're doing a "fixed price build", the only cost over-runs should be from "change orders" and I highly recommend paying for any and all change orders "out of pocket." That is one sure-fired way to keep yourself from going overboard on changes. LOL!

bj We had a simialr siutation. We used up our cash on the first 2 draws plus a partial on the third (the bank paid the other part of draw 3). AFter that - all draws were paid by the bank. We chose this route to delay the interest payments on the contruction loan for as long as possible. We broke ground in September of last year - but our first significant payment of interest to the bank just started this month. That worked out best for us because we had big delays (remember to get a schedule!) and at least we weren't caught having to pay interest on the loan during this time. You could flip the strategy and use bank funds up early - but then you have interest payments earlier. And if you have a delay - you will be paying interest (stress meter is starting to rise!) Either way can work - just think about your cash flow as well as tax situation (maybe you need the write off). The mechanics are very simple. For the draws we paid from our cash - we wrote the builder a check. Get a receipt for the draw from the builder because the bank needs it as proof of payment before they will start paying draws from the money you are borrowing. When you do this - you might want to have your own inspection done prior to each draw to make sure all work has been done to code or do your own inspection. I chose to do my own inspection. Once you are through with your cash out - then the builder will make contact with the lender to say he is ready for the next draw. The lender will schedule an inspection - once complete - the draw will be paid. Don't expect these inpsections to be anything more than a quick look to make sure that the major pieces are in place. We decided to have an active role in the dispersement of the money (your lender should have a form that you must sign and the builder must sign that is an agreement on the disbursement method). An active role means that when the builder asks for the draw - the bank contacts me to see if it OK to send the money, even after the inspection is done. I also opted (this is on the disbursement form) to have the money deposited into our bank account. Then I pay the builder with a check. My builder does not like this arrangement - most won't. My banker advised me to do it since it gives me some level of control. I happen to like it. If you opt for the passive role, then the builder asks for a draw - bank sends out inspector - and then money is directly deposited into the builders account. You are notified of what is going on, but the entire transaction is done without you having to specifically approve of the draw disbursement. Hope this helps.

I am sorry for your trouble. I am from a rural area and what live_wire_oak says is true--discounted sales are comps. In my rural area, high end houses are always worth less than they cost to build because there aren't many people that can afford to buy a high end house and those that can build their own. When the people who build these high end houses leave, the houses are sold at what you may think is a very discounted prices but which is really the FMV in a rural economy, even when the economy is good. Banks, especially now, have to look at market value in the area, not cost, when making their loans. I can feel your pain because you should have been told this at the beginning, not the end. You need to appeal the appraisal, but you are correct that it will be difficult because appraisers have taken a lot of the blame for the current mortgage crisis and are now being more careful than they used to be. I would also investigate whether you have any type of claim against the original appraiser--your reliance on his appraisal has harmed you.

I've been researching construction lenders in SoCal for over a year. If anyone is interested, here are a few lenders that offer one time close loans: BBVA Compass, First Republic, Boston Private, US Bank, Homestreet, JP Morgan Securities, and California Bank & Trust. The biggest differences are reserve requirements (12 months PITI to 20% of construction budget) and what rate they use to qualify you. Two of the banks above have qualifying rates of 6%, even though the 7/1 note rate is under 4%. I had never heard of Luther Burbank, but called them based on the the posts above. Their 5/1 is comparable to others, but other aspects of their underwriting process are more used friendly. I may end up using them, so thanks Buttons Hayama.