Pros and Cons of Construction Loans
rjinga
3 years ago
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B Carey
3 years agoRelated Discussions
Land and construction loans: how does this work?
Comments (8)I know you mentioned "owner financing" but I tend to be leery (both as a buyer and as a seller) of owner-finance deals. Do read the link below. We bought the land for our current dream house about five years in advance of starting to build our house so I learned a few things along the way that might be helpful to you and may suggest another avenue for you to follow. First and foremost, land only loans are notoriously hard to get - even for property within a neighborhood that is already developed in terms of utilities. There just are not that many lending institutions that make land-only loans. Plus, the interest on land-only loans is MUCH higher than on practically every other kind of loan. In 2003, we bought 4 acres in a development that, I suspect, is very similar to the one you're describing. Price was right at $50K for the 4 acres. In 2003 mortgage and construction loans for those with good credit were running around 4.5 to 5%, and we could get a loan to buy a car or even a motorcycle for about 7%. But every place we asked about a land only loan wanted 8.5% or more! I have no clue why this is. It's not like one can abscond with a piece of land, or wreck it in a crash and then refuse to finish paying it off. But that's the way the market is. On an owner finance for a land-only deal, I would not be at all surprised if the seller wanted a percentage point or two above what banks are currently asking for on land only loans. After all, if the seller originally purchased the land by taking a land-only loan and still owes something on that loan, he's going to want to get enough to pay back his own loan plus make something for his trouble. When we decided to buy our new land, we already owned a home and had significant equity in it. So we realized that we could do "equity out" refinance on our first home and use the money to buy our land out-right. Because interest rates had fallen significantly since we'd first purchased our house 18 years previously (a 30 year flat rate), even after paying the fees to refinance, we actually came out ahead. Our monthly payments stayed almost exactly the same (the difference was less than $10/month) and even though we had taken out $50,000 in equity, the total remaining pay-out period only changed from 12 years to 13.5 years. We then started making extra payments each month and actually finished paying off the original mortgage plus the additional $50K loan in just five years more years. So the upshot is that we basically got to "borrow" the $50K to buy our land for free. So, if you already own a home and have equity there, you might look into a home equity loan instead of an expensive land loan or taking the risks associated with an owner-finance deal. The other thing is that, when you are ready to start building, the bank that makes your construction loan is going to insist on having foreclosure rights on the land the house will sit on as well. (That's reasonable since it would be pretty much impossible to foreclose on a house without foreclosing on the land it sits on!) And the bank is NOT going to want to be the junior lien holder on the land. So yes, you will have to finish paying off your land loan either before - or concurrently - with getting your construction loan. Whether a bank will loan you enough to pay off the land AND build the house you want is pretty problematic. Banks now typically will only loan 70% of the value of the finished property (house and land) and they expect the homeowner to put down the other 30%. If you own the land free and clear when you go to borrow construction money, you can claim its value as part of your 30%. If you still owe money on the land, then you are going to have to ask for a bigger loan (so you can pay off the land) and will have less equity to apply to your 30%. The bank that is going to make your construction loan won't care if you pulled some of your equity out of a previously owned house in order to buy the land outright. As long as you own the land free and clear, it's value can count toward the 30% you'll need to put into the new deal. Of course, one of the questions the bank WILL ask in determining how much of a loan you can qualify for, is how much you are currently spending on mortgage payments on unrelated property. But they don't care how much or how little equity you have in the unrelated property because they can't foreclose on that property if you fail to make your payments on the new place. Anyway, it's just an idea. It worked very well for us and might work for you. Here is a link that might be useful: Pros and cons of owner financing for buyers....See MoreConstruction/Mortgage Loan
Comments (12)We had a construction loan from one bank and then did the mortgage loan with our credit union. The credit union actually call the mortgage loan a "refinance" which saved us a few $$$ On another note about saving a few $$$ if you can take your loan out as "bi-weekly" you would save a tremendous amount over the life of the loan....you would be making a payment every two weeks which adds up to two extra payments a year. Doesn't cost any extra to set the loan up that way and you can still keep it within your budget or what you planned to spend monthly. It's something the banks don't really advertise. Good Luck...See MoreBreaking ground in winter: pros/cons?
Comments (11)Cold weather concrete work is not as difficult as you might first think because only the air temperature would be below freezing and the earth as well as hydrating cement produce heat so by heating the materials used in the mix, adding an accelerator, and covering the forms with insulating blankets, it is usually possible to avoid the high cost of tenting and heating. The most important issue is to not let the bottom of the excavation freeze and that is often a matter of timing. If the setting of forms is delayed the surface can be temporarily covered with straw bales or back filled. Any cold weather concrete construction specification would be based on ACI 306R-10 "Guide to Cold Weather Concreting" which costs about $60 in hardcopy or PDF download. I would hope your contractor has a copy but I suggest you not ask. You could just stipulate in the contract that the concrete work will conform to ACI 306R-10 but you can get the basics of the its recommendations by googling "Grace TB 0106". This is good stuff but there is no substitute for an experienced contractor....See MoreClosing costs for construction loan
Comments (5)We had a closing on the interim construction portion and will have a closing on the final mortgage. I've read pros and cons to both methods, but we didn't have a choice anyway as the local banks and credit unions here only offer two closings. We also had the option to either pay our settlement fees up front at closing or roll them into the first draw of the loan....See Morerjinga
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