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    Construction Loan question

    We are looking at buying some property and we have a house plan picked out that we like. I talked to my mortgage guy that I’ve used for my last 2 houses about a construction loan and he told me that I would be looking at paying 5% down initially and then I would have an interest rate of 5.8% during the construction process and 4.3 once construction was done and we converted it into a regular loan.

    My question is while the house is being built, do I make payments monthly like I would for a normal mortgage? Or do I just make a payment when my contractor takes a draw out for whatever phase in the process he’s in? As in if he only takes 4 draws over the 8-10 months he expects it to complete house, am I just making 4 payments during this time or do I make a 5.8% payment each month on whatever’s been borrowed to that point? Also, when I make this %5.8 payment whether it’s monthly or just per draw, am I lying straight interest to the bank separate from my future mortgage? Or does that $ go towards the interest I will owe when we finish be loan?

    I didn’t understand this part of it and it’s concerning to me because the cost to do this is rapidly rising more than I anticipated. Total amount of the loan will be approximately $400,000 minus about a 30K initial down payment. Paying 5.8% for 8 months could become very costly. We’ve never been thru this process so if anyone has knowledge of how it goes I would appreciate it.

    Thx

    #2
    For ours we paid monthly on the amount drawn on.

    Comment


      #3
      Originally posted by CWaller30 View Post
      For ours we paid monthly on the amount drawn on.
      And does this $ just go straight to the lender as interest, or do they put it towards your future interest on your home loan? Its scaring me because this could wind up being well over 20K that I kinda feel like I would just be pissing away

      Comment


        #4
        Originally posted by roaddawg View Post
        And does this $ just go straight to the lender as interest, or do they put it towards your future interest on your home loan? Its scaring me because this could wind up being well over 20K that I kinda feel like I would just be pissing away
        This is a question for your mortgage guy as there are different construction loans with different nuances.

        Comment


          #5
          Money goes to lender. You only pay interest on the amount of the balance from the draws that you have had. Your first payment will be cheap because you may only have your first draw after the first month or so depending on start time from loan close. Then it will get higher as the draws become more frequent. The interest is not that bad while you are building. Get built and stay on your schedule to minimize interest payments.

          We paid probably less than $2k on a 6 month build. You would have to have a serious build to hit $20k.

          Comment


            #6
            We opted to make payments during construction to lessen the blow once it turned over. It didn't make a huge difference but we felt like we were accomplishing something. We needed that during the build process because so much was out of our control.

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              #7
              I made interest only payments to the loan company on the amount drawn for 7 months till the house was finished. Then did another loan for the full amount as a regular mortgage after construction was finished and took ownership of the house.


              Sent from my iPhone using Tapatalk

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                #8
                different lenders do it differently - you need to be asking your mortgage person these questions.

                If it was with our bank you would be paying 5.8% (really good construction rate by the way) monthly on the amount of money that you had drawn to date and it would be going directly to the bank as interest only and would have no effect on your principal balance owed or your future perm mortgage. Once you had drawn the full $400,000, you would be paying about $2,000/month towards interest to the bank until you got the balance financed over to your perm mortgage note.

                Comment


                  #9
                  Originally posted by Codie View Post
                  different lenders do it differently - you need to be asking your mortgage person these questions.

                  If it was with our bank you would be paying 5.8% (really good construction rate by the way) monthly on the amount of money that you had drawn to date and it would be going directly to the bank as interest only and would have no effect on your principal balance owed or your future perm mortgage. Once you had drawn the full $400,000, you would be paying about $2,000/month towards interest to the bank until you got the balance financed over to your perm mortgage note.


                  This is how it worked for us.


                  Sent from my iPhone using Tapatalk Pro

                  Comment


                    #10
                    Originally posted by Powertool1994 View Post
                    I made interest only payments to the loan company on the amount drawn for 7 months till the house was finished. Then did another loan for the full amount as a regular mortgage after construction was finished and took ownership of the house.


                    Sent from my iPhone using Tapatalk
                    This is the process we did on our last house.

                    Sent from my SM-G975U using Tapatalk

                    Comment


                      #11
                      Originally posted by Codie View Post
                      different lenders do it differently - you need to be asking your mortgage person these questions.

                      If it was with our bank you would be paying 5.8% (really good construction rate by the way) monthly on the amount of money that you had drawn to date and it would be going directly to the bank as interest only and would have no effect on your principal balance owed or your future perm mortgage. Once you had drawn the full $400,000, you would be paying about $2,000/month towards interest to the bank until you got the balance financed over to your perm mortgage note.
                      Thx for the info. I may be totally off on this but help me figure out where I’m going wrong here. There will be 4 draws by the builder from the lender to get the place built. For sake of argument let’s say the loan does come out to being exactly 400K, and each of the 4 draws would be approximately 100K. I only pay 5.8% interest Each month on the amount I’ve borrowed to that point. So the 1st months payment would be 5.8% of 100K, or $5,800. Then let’s say by the 2nd or 3rd month the 2nd draw takes place and now I’m paying 5.8% interest on 200K, or $11,600. After the 3rd draw the payment would go to $17,400. And then after the 4th it would go to $23,200. So I feel like I can’t be looking at this correctly because this number would be massive by the time we closed on the loan after it was built. If I’m an idiot and my logic is not even remotely correct please tell me. Also my mortgage guy told me there would be about 7K in closing costs at the end of the build.

                      Comment


                        #12
                        + the 5% down initially to get the loan

                        Comment


                          #13
                          Originally posted by captainsling View Post
                          Money goes to lender. You only pay interest on the amount of the balance from the draws that you have had. Your first payment will be cheap because you may only have your first draw after the first month or so depending on start time from loan close. Then it will get higher as the draws become more frequent. The interest is not that bad while you are building. Get built and stay on your schedule to minimize interest payments.

                          We paid probably less than $2k on a 6 month build. You would have to have a serious build to hit $20k.
                          So you paid less than $2000 total interest throughout the whole construction process?

                          Comment


                            #14
                            Originally posted by roaddawg View Post
                            Thx for the info. I may be totally off on this but help me figure out where I’m going wrong here. There will be 4 draws by the builder from the lender to get the place built. For sake of argument let’s say the loan does come out to being exactly 400K, and each of the 4 draws would be approximately 100K. I only pay 5.8% interest Each month on the amount I’ve borrowed to that point. So the 1st months payment would be 5.8% of 100K, or $5,800. Then let’s say by the 2nd or 3rd month the 2nd draw takes place and now I’m paying 5.8% interest on 200K, or $11,600. After the 3rd draw the payment would go to $17,400. And then after the 4th it would go to $23,200. So I feel like I can’t be looking at this correctly because this number would be massive by the time we closed on the loan after it was built. If I’m an idiot and my logic is not even remotely correct please tell me. Also my mortgage guy told me there would be about 7K in closing costs at the end of the build.
                            You won’t pay 5.8% for each 100,000. That is the interest rate for the loan. You are not paying the full amount for the whole year. If it was a one year loan, then you would be paying the full $5800 per 100,000.

                            Someone correct me if I am wrong.

                            Comment


                              #15
                              Originally posted by roaddawg View Post
                              So you paid less than $2000 total interest throughout the whole construction process?
                              Yes. We built in 6 months and had less than $200,000 in draws as we used a lot of cash from our previous home.

                              Comment

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