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New Construction Home: Pay Cash vs Construction Loan

5 years ago

My husband and I are in contract to build a house on a lot that we purchased with cash. We are ages 53/54 and about 6 years from retirement.

We are considering whether to pay cash or take out a construction loan. With either scenario, the builder would be paid in 5 draws based on specific parameters of the project being met (foundation poured, framing, drywall, etc.)

Cost of Lot: 153,000
Cost of House: 584,000
Total: 737,000

Equity in current house: 400,000

I have only talked to our current mortgage lender so far. That bank offers a construction to permanent 3/1 ARM at 4.375% plus about $4500 in closing costs. Since we have the full amount in cash at Ally Bank, we feel that it makes no sense to finance the construction loan considering the interest rate and closing fees. We can pay the full amount of 584,000 to the builder from our savings account and still have 275,000 left in an emergency fund. Then when our current house sells, we will recoup 400,000 which can be placed in CDs/Bonds.

If we do pay cash to the builder, we are wondering what safeguards we need to protect ourselves. These are some of the items I can think of as of now? Open to any advice

1) Obtain Cost Sheet from builder? We have our contract, plans and Spec Sheet but the bank would require a "builder cost sheet" for financing so wondering if this is something we should obtain if we are providing our own financing.

1) Hire our own inspector to inspect work prior to each draw?

2) Do we need to worry about obtaining Lien Releases for the subcontractors?

3) Do we need to purchase additional title insurance other than the initial title insurance when we closed on the lot?

4) Do we need to involve a real estate lawyer? We've already signed the contract so I don't know what value a lawyer would add at this point.

5) The builder is requiring a letter from our bank stating that we have sufficient funds to satisfy the contract price. Should we ask him to provide us with any documents proving that he has sufficient capital to pay his subcontractors. The builder has a good reputation and we trust him but just wanting to make sure we protect ourselves as well.

Any other advice from people who have paid cash for new construction?

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