Financing Your New Home Construction: Five Considerations
There are several ways to purchase a home. You could buy an existing home. This type of home breaks down further into two subcategories: new homes and previously owned. This type of mortgage financing is the largest share of the mortgage market.
The other type of home purchase is the construction of a new home, built according to a specific plan. The opportunity to build your home based on your wish list is very tempting. But financing a new home construction project is not as easy to do, representing a small part of the home lending market. Here are five considerations that need to be discussed before you make any decisions.
One: The Builder Option
Builders may offer financing for a new home. This may be a viable option for some new home buyers. If the builder’s plans meet your needs and there are no requests for customization, the builder’s offer to carry the construction portion of the loan allows the buyer to commit without looking for the financing on their own. It also incentivizes the builder to finish on or before the scheduled completion date.
Two: The Two Loan Option
Obtaining a loan on your own often requires the purchase of two different types of loans. Many lenders will separate these loans into two, one for the construction phase and one for the mortgage phase.
Three: The Cost
New construction loans are often variable in nature. These types of loans have adjustable rates, changing on a monthly basis as the prime interest rate shifts. The short-term nature of the loan requires the buyer provide detailed information about the project, including plans and builder time tables. It also requires the borrower to prepare for the worst case scenarios: construction delays, cost overruns, and the possibility that your customization requests will negatively impact the sale of the completed home should financing schedules change.
Four: The Fees
Even while accounting for the possibility of a monthly or quarterly interest rate adjustment, the actual interest rate offered for this short-term arrangement is often higher than a typical permanent ARM. And even as these payments are interest only during the period of construction, there is often a closing cost of the loan that may not roll over into the permanent mortgage you are purchasing at the end of the construction process.
Five: One Loan or Two
You may come away from the experience with the feeling that this whole process is rigged in favor of the lender. You would be mostly correct in that assumption. The lender offering combination loan, one where they finance the construction and then, after construction is complete, able to set the terms of the next loan, may not be your best option. Combining the loan will give you a better comparison tool when shopping your options. Lenders will often provide these loans based on a point system, one point for borrowers who opt for the combination; two points for loans that have an option to leave the lender upon completion. The value of the home at the end of construction will also impact the next stage of the process.
One Last Thought
The combination loan rate must be as good as the rates offered by two separate loans to make it worth the extra effort this offer might require. And even if it is, you will need to get assurances that the lender will be indexing the price of the permanent portion of the loan at the time of completion.
How can we assist you today?
On behalf of The Jones Group @ Sunriver Realty
Nola Horton-Jones, Principal Broker/Realtor | ABR, C-RIS, e-PRO, GREEN, RSPS, CCIM Candidate
Bryce Jones, Broker/Realtor | ABR, CRS, e-PRO, GREEN, GRI, RSPS, SFR
Karen Marcy, Broker/Realtor
The Jones Group @ Sunriver Realty | 57057 Beaver Drive | Sunriver, OR 97707
Mobile: 541-420-3725 | Mobile: 541-420-4018 | Mobile: 503-327-9611 | Fax: 541-593-5123
Licensed in Oregon