Your house hasn't sold yet. How do you know you have 20% equity to use as a down on the new house? Do you know what percent of listing price homes are selling for in your area? 97%, 95%, 90%? Are sellers commonly paying points, closing costs, or other incentives to sell in your area? My point is that you don't know what equity you have in your current home until it's sold & CLOSED.

Also, does the hoped for 20% equity in your present home equal 20% down on the new home? Are you allowing an extra 10-20% over your anticipated construction costs to build the new home? If not, you might do well to visit the "Building New Home" forum before you commit to building.

As far as the loans go...can you afford 3 mortages if your current home doesn't sell before the new build is complete? I don't know what type of home you're building...some stick builds can take over a year to complete but a modular placed on your lot may only take 3 months. What is the average DOM for homes in your area? I'd go with the straight 15% down but suggest caution. It sounds like you anticipate having the new home ready for closing before you sell your existing home...hence, the need to pay 3 mortgages (current home, bridge loan, & mortgage for new home).

Good Luck
Tricia

We built a home with nothing out of pocket - but you have to do a true custom. We took our plans to an appraiser, and he did a value based on the plans & the lot location. We wanted another lot intially that was cheaper, but the appraiser said he couldn't get the value up in that neighborhood. We bought a lot in a gated community with the first draw of the construction loan, and then paid everything else as it came due (foundation, framing, roof, etc.). The final draw was the builder's 10% commision. When it was finished, we refinanced the construction loan into a mortgage - and presto: an 80% value note w/no PMI or down payment. This has been done for years. You just need to find a lot for sale that a builder doesn't own (they mark them up quite a bit), and a custom builder you trust. The last thing might be the hardest part, as our builder wasn't the most trustworthy... Good luck.

Lenders aren't doing as much of that these days. They've really pulled it in over the course of the past year. Today, they want to see an F&C site. Or, at the least...whatever funds one is putting into the property go in first before the construction loan starts funding.

Appraisers are also being more cautious after the recent debacle in Colorado. The "To Be Built" appraisal coming in at 20-30% over stated costs are getting much tougher to get unless, of course, there truly is up-front equity.

Tricia

Your 80/20 scenario most likely has a second mortgage that is a HELOC. HELOC's have variable rates, is that what you want?

A 15% no MI loan can actually be a lender-funded MI ... or something similar. One way or another they are building into their rate the risk of you not obtaining mortgage insurance. So you are probably paying for it through the rate. Compare that rate to what rate they would charge you if you had 20% to put down. Is it the same?

You need to compare payments, are both fixed rates? For the 80/20 does the second mortgage have a penalty if you pay it off early (many of them do)?

Of course the lender is offering you an 80/20 loan. That's because they get two commissions off of it because it's two different loans. If you can avoid that, do so at all costs as the 20% portion is most likely a HELOC and at a higher rate of interest.

Another way to avoid PMI is to pay for it outright.

Hi Sparksals,

Of course the lender is offering you an 80/20 loan. That's because they get two commissions off of it because it's two different loans.

Ehhhh... no... not so much. Anit-predatory lending regulations restrict the fees that a loan can carry as a percentage of the loan itself... and because these regulations vary widely from region to region, most lenders "toss in the towel" and charge no fees on a 2nd lien at all, requiring all costs to be placed against and measured against the 1st lien only.

If you can avoid that, do so at all costs as the 20% portion is most likely a HELOC and at a higher rate of interest.

While it is CURRENTLY true that 2nd lien HELOCs are at a premium to most 1st lien mortgages, this is not always the case. Further, fixed loan 2nd liens can be very competitive, sometimes even matching the rate of the 1st lien loan.

The entire financial logic of splitting loans into an 80/x combo is to avoid the non-deductible costs of PMI without giving up the benefits of the leverage itself.

Another way to avoid PMI is to pay for it outright.

Certainly is ONE way... though not usually a very smart (financially) way. Unleveraged real estate (ESPECIALLY primary home real estate) is safest and most financially advantageous to the owners when properly leveraged to the maximum that the owner's safe cashflow budget supports (after all reserves and living costs are considered.)

Cheers,
Dave Donhoff
Strategic Equity & Mortgage Planner