There are two types of construction loans that potential home builders can apply for. The first one is the construction-to-permanent loan. This type of loan has only one closing, and it reduces the number of fees you will pay. Interest is paid only on the outstanding balance. The interest rate varies during construction, and it moves up or down with the prime rate. The Federal Reserve can raise or lower the short-term interest rates while the house is being built. The lender can convert the loan into a permanent mortgage after the house has been built. Like any other conventional mortgage, you can choose a fixed rate or an adjustable rate. After the rate is chosen, you can specify the loan terms. This will determine whether the new mortgage is paid over a period of 15 or 30 years.
It may benefit a new home builder to do their due diligence regarding mortgages. Chances are, if you can figure out the type of mortgage you will get after your new house is built, you may get a better idea if construction loans are right for your situation. Many lenders let you take the maximum mortgage rate when construction begins. A down payment of at least 20 percent of the expected amount of the permanent mortgage is required. Some lenders make exceptions, depending on your financial situation and plans for the home you are planning to build.
If you are still concerned about your financial stability during the process of building your home, you can opt for the stand-alone construction loans. This allows you to make a smaller down payment. It can be a major advantage if you already own a home and you do not have much cash for a down payment. You are able to live in your current home while your new home is being constructed. You will have more cash available to you once your new home is complete and you sell your old home.
There are some drawbacks to stand-alone construction loans. You will have two closings and two sets of fees to pay. One set is for the construction loan, and the other is for the permanent mortgage. You cannot lock into the maximum mortgage rates because they increase during construction. You might have to pay higher than expected interest rates on your permanent loan. If your financial situation worsens during construction, you may find it difficult or nearly impossible to qualify for a mortgage.
When applying for stand-alone construction loans, the lender does not allow a complete home to be accepted as collateral. They will want details about the contractors and the sub-contractors doing the work and more details about the home’s size and materials being used to build it. The lender needs to know if you can make the required payments to satisfy the loan agreement. Should unexpected costs occur throughout the course of the project, you will need savings or a well-thought-out plan to cover these costs. A better plan may be to change your construction plans. Maybe you are reaching beyond your means. Yes, a Jacuzzi tub is a nice addition to any bathroom. However, when it comes to the cost, is it really something you can do without? When building your home, you need to keep in mind what you can afford. There is a difference between something you want in a home and something you absolutely need. Know the difference between the two, and you should be certain that you meet your construction budget goals.
Do your homework when you are looking for a contractor to build your home. Check their records with the Better Business Bureau. Any past problems or issues clients had may be available in their records. Your lender will look at the contractor’s credit standing, financial situation, licenses, and track records for building homes. Any discrepancies in your contractor’s past work may cause higher-than-expected interest rates. The lender pays the contractor in stages. As the work on the new home continues, the lender conducts several inspections to make sure that construction is proceeding as planned. A serious lapse in the work progressing or shoddy work that needs to be redone in order to pass inspection can cause a delay in payment.
Constructing a new home in Cedar Rapids, Iowa City, Waterloo or other surrounding areas in Iowa does not have to be complicated or even cost a fortune. Pick the area where you are looking to construct a new home. Does your income at least meet the average income for that particular area? Are you going to be able to live comfortably after you pay all your monthly bills and home and property expenses? What is the history of the property taxes in the area? Do they rise every so often? Are you going to be able to keep up with the rise in costs while paying your other monthly obligations?
If you are finding yourself unable to answer many of the questions asked here, you may want to rethink about having a house built. Maybe you are better off buying an existing home and fixing it up. Many homes on the market that need work can become very inexpensive, depending on how long they have been available and what type of improvements need to be made. Before you even decide on pursuing a construction loan, compare the cost to buying a home that is a fixer-upper.
Do you find that a lot of the contractors who build new homes also fix up and remodel older homes? If so, what is the difference in costs between the two plans? What kind of guarantee comes with fixing up an older house compared to constructing a new home? Is there a difference in the appraisal or the inspection process? If you were to fix up an older home, would you have to go for the construction loan because of the work you need to do? There are many questions you need to ask yourself before you decide on the type of home that is right for you.
