For those who are considering purchasing land — or already have land — and also intend on building a new home from the ground up, or renovating an existing home before occupying it, there are times when a construction mortgage can make sense. In fact, in these circumstances, it can make sense most of the time. They are a way to finance the land and also the construction. Just keep a few things in mind.
First of all, most traditional mortgages of this type are short-term in nature, usually lasting no more than three years. A mortgage of this type is nothing more than real estate financing, and the construction will be secured by a mortgage that is taken out on the home and property being financed. It’s set up to cover various costs involved in land development and building construction.
It is an excellent way to build on land or build or renovate a home that already exists before moving into it. This sort of mortgage can make sense for those who are “cash poor” and do not have large sums of money to put towards the construction of a home built from the ground up. These kinds of mortgages allow a borrower to obtain a significant portion of the total cost of the construction project.
Additionally, there are mortgages of this type that are made available and which feature a much better interest rate when only a small amount of money will be required in order to renovate the structure prior to obtaining a certificate of occupancy from the local town or city and then occupying it. The most common variation of this loan is called a “construction to permanent loan.”
This particular kind of construction loan or mortgage is a good financing instrument to take advantage of in order to avoid the issue of paying double closing costs or double the amount of fees when one obtains a separate construction loan and then an additional permanent mortgage once construction has been completed. Also, permanent interest rates can be locked in at the beginning of the construction.
This is a particularly attractive feature, because there have been many people who have obtained the more traditional construction mortgage and ended up looking at a notable increase in the interest rate when the superseding permanent mortgage was instituted. In that case, the lower rate occurred during purchasing construction but the higher rate was instituted at final closing.
In every case, regardless of the specific type of construction mortgage, it makes a lot of sense to me with the lender and the building contractor to discuss payment schedules. It can be kind of an intricate dance with the person taking out the mortgage sitting in the middle trying to coordinate payment from a lender to payment to a builder. Make sure everyone is on the same page when it comes to payments.
Additionally, it is also a good idea to try — whenever possible — to keep all borrowing with the same funding source. It makes sense to do so because it becomes doubly hard when one has to obtain construction loan financing from one lender but then has to turn around and attempt to obtain permanent mortgage financing from a different lender. Fees can double in many cases.
When you’re deciding to buy a house, some of the factors that you have to take into account are mortgage rates. As mortgage rate is important for home-buyers, GIC rate is important for investors. If you’re interested in a customized financial plan, remember to visit us.