new home mortgage question

[rtp]

So Im in the beginning stages of building a new home. I bought the land 1.5 years ago and hope to have a slab being poured at the beginning of March. My plan was to pay cash for the home during the building process(no construction loan) and then once the home was complete, decide whether or not I wanted to do a mortgage on part of it or not. I have been told by a lender that if I do that the loan will then be considered a home equity loan and not a home mortgage loan. Can any or you experts tell me if this is true or not? Ive googled this and cant seem to come up with a clear answer. Also, would you recommend I get title insurance in this scenario or not? Thanks in advance.

[Grayson]

So Im in the beginning stages of building a new home. I bought the land 1.5 years ago and hope to have a slab being poured at the beginning of March. My plan was to pay cash for the home during the building process(no construction loan) and then once the home was complete, decide whether or not I wanted to do a mortgage on part of it or not. I have been told by a lender that if I do that the loan will then be considered a home equity loan and not a home mortgage loan. Can any or you experts tell me if this is true or not? Ive googled this and cant seem to come up with a clear answer. Also, would you recommend I get title insurance in this scenario or not? Thanks in advance.

Lender will most certainly require a lender's policy. I'd get an owner's policy, it's cheap insurance in the long run.

[BitBackShot]

Why are you against doing a construction loan? We did one when we were gutting and adding on to our house and it was pretty easy/painless. You only pay interest on drawn amounts (not committed capital) during construction, so the payments are pretty small.

[BigWes]

I'd think you could do it a couple of ways. A home equity loan would be one of those options. Don't know if you have a loan for the purchase of the land or not, but then you'd have 2 separate loans, which may or may not be advantageous. The other way would be to do a traditional mortgage where you could probably pull out a large amount of cash. This would pay off any land loan you have and may give you more preferential rates.

I'm no expert, and I did NOT stay at a Holiday Inn Express last night, but I have thought about doing the same thing you are doing and this is what I have come across.

[BrianL]

Yes that is correct and I would STRONGLY suggest not to do it that way. Do an interim loan, then put down all you want at the end. THen you have the option of a 1st mortgage or having it paid off.

I have seen several people fall into this only to be 30-40K short at the end. Then many FI won't do a home equity on a house that isn't completed. The people don't have the $ to complete....nightmare.

[BrianL]

Have your interim BEFORE you pour that slab or it is too late.

[BrianL]

One more thing. Get the interim approved for the full amount. You don't have to use it. If you don't use any, it cost only the closing amount. Interest is paid only for the amount of money you have drawn on, not what it is approved for.

[rtp]

Why are you against doing a construction loan? We did one when we were gutting and adding on to our house and it was pretty easy/painless. You only pay interest on drawn amounts (not committed capital) during construction, so the payments are pretty small.

Talking fairly significant dollars. The difference between construction loan and using my money on margin from an investment account is 5.5% vs 2.5%. So that is why I wasnt wanting a construction loan.

[rtp]

One more thing. Get the interim approved for the full amount. You don't have to use it. If you don't use any, it cost only the closing amount. Interest is paid only for the amount of money you have drawn on, not what it is approved for.

Ok, I see this makes sense. I will run this by the mortgage guy Im dealing with. Im always afraid to take for gospel what Im hearing from the guy that is selling me a product.

[Dejashoot]

Following. I’m somewhat in the same position. I’m leaning towards a full construction loan and turning that into a First. I have the cash to pay for the whole thing but want to use someone else’s money while it is cheap. My 22 acres is paid for.

I’d bet Richard has the cash to pay for any overages that may come up to complete the build.

[Throwin Darts]

Have your interim BEFORE you pour that slab or it is too late.

This is the most important advice on this thread. If you pour the slab without the loan in place no one will make you a loan on this property.

Here is my advice. If you do a home equity loan the problem with that is the rate will be floating. In this low interest rate environment there is no way I'd want a floating rate and not a fixed rate.

I'd get a construction to perm loan. Ask about a one time close to minimize closing costs. I'd borrow what I wanted and pay cash for what I wanted. At the end of it you can have some low rate fixed rate money. Make sure to look at the after tax cost of the mortgage loan if you can deduct mortgage interest because the tax effective rate will be lower than the face rate.

You could also tack on a home equity loan at the end of the process up to 80% of the value of the home. That's cheap money that you don't pay for unless you need it.

[BitBackShot]

I'd get a construction to perm loan. Ask about a one time close to minimize closing costs. I'd borrow what I wanted and pay cash for what I wanted. At the end of it you can have some low rate fixed rate money. Make sure to look at the after tax cost of the mortgage loan if you can deduct mortgage interest because the tax effective rate will be lower than the face rate.

You could also tack on a home equity loan at the end of the process up to 80% of the value of the home. That's cheap money that you don't pay for unless you need it.

This is exactly how we did it. Thought it worked out great.

[Jerry Worley]

Listen to the banker guys like Dustin. They do this everyday for a living.

[1riot1ranger]

Not sure if you are the general contractor yourself or have already selected a custom builder. We went through a similar exercise on our home. After talking to several builders we found that Tilson could do what we wanted, less expensive, and without having to do an interim construction loan. Tilson works with the lender and may require your down payment upfront, but they have some flexibility in how they do that.

[asttbe]

I'm no help here, but if you are moving landscaping stones I may or not be for hire