By Michael Nykiel, Mortgage Loan Officer
Whether you’re a first time homebuyer or an experienced one, the task of buying a new construction home can be tedious and overwhelming. From finding a community to live in, a piece of property to settle on and a builder to bring your dream home to fruition, the process can take months, with many hours of planning and decision making.
First, you will need to find a realtor to help you with the process. Keep in mind that builders pay real estate agents their commissions, not the buyer. That’s right, the builder will pay your agent to represent you and to negotiate a better deal for you. You will want to find a realtor who is experienced in negotiating with builders and one who will be transparent with you. Once you have selected your realtor, you can develop your plan. They will be able to help you with all your wants and needs, which will help in researching different builders in your area.
Once you have decided on a piece of property and a builder, you can choose your financing options. Here are the common financing options available.
1. Construction to Permanent Loan:
Construction to permanent loans provide the funds to build the dwelling and your permanent mortgage as well. In other words, under a construction-to-permanent loan, you borrow money to pay for the cost of building your home and then once the house is complete and you move in, the loan is converted to a permanent mortgage.
The benefit of this approach is that you only have one set of closing costs to pay, reducing the overall fees you’ll pay in total.
Once it becomes a permanent mortgage — with a loan term of 15 to 30 years — you’ll make payments that cover both interest and the principal. At that time, you can opt for a fixed-rate or variable-rate mortgage.
2. Construction Only Loan:
A construction-only loan provides the funds necessary to complete the building of the property, but the borrower is responsible for either paying the loan in full at maturity (typically one year or less) or obtaining a mortgage to secure permanent financing.
The funds from the loan are disbursed based upon the percentage of the project completed, and the borrower is only responsible for interest payments on the money drawn. Construction-only loans are almost always tied to prime rate plus a margin.
These loans are subject to a change in the interest rate every time the prime moves. Construction-only loans can ultimately be costlier if you will need a permanent mortgage as well. That’s because you will be completing two separate transactions and paying two sets of fees. These are two separate loans that are totally independent of one another. Two loans, two complete sets of financing expenses.
One important note is that if your financial situation worsens during the construction process, due to a job loss, for example, you might not be able to qualify for a mortgage later on that actually allows you to move into your new house.
3. End Loans
An end loan is another name for a mortgage. There is a construction loan that’s roughly 12 to 18 months in duration and is purely for new construction. When the house is complete and that loan gets repaid, you need to go out and get an end loan — or a mortgage.
Work with a realtor and lender and make this process less stressful for you and your family. Contact our team at 877.312.9033 to get started.