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I'm having a custom home built (weeks away from builder contract) and am new to the world of the construction loan. I was hoping for some help and advice from experts here as it's almost time to pick a lender.
I am building a house that will cost 595,000 land and structure. Have 175k liquid right now (no other investments except 401k) and owned home free and clear worth roughly 230k on the market.
Construction loan is going to likely be at the max 417k at 3.99 in my area with a 1 percent setup fee I can't seem to get around. I intend to cover the rest of the 595k via an 80/10 swing loan on my property which I am putting on the market closer to completion of construction. I am going to start with a big loan as I initially thought using most of my cash plus the home equity when it sells made more sense, but if I can get a good 15 year rate it makes sense to hold onto that cash and just make the bigger monthly payments from it right?
At that point I want to refinance the construction loan to a an online lender with better rates than the local bank such as PenFed. Will look at doing a 15 year fixed or the 15/15 ARM.
Just wondering if I am on the right track here or missing anything obvious. One bank is willing to let me close once and lock both construction and mortgage at one rate today but it is high (4.9 30 year fixed). If the other local bank is willing to finance just the construction loan, leaving me free to take my business elsewhere for the mortgage after construction, what are the risks?
Only my second house and the first was a simple fixed with cash down, so I'm new to this world of swing loans, construction loans, float downs, recasts, etc.
If you can find a lender that offers an OTC (one time close) builder loan.
You pay prime plus 1 while the home is being built and make I/O payments on money used during the building process, once it is completed it converts to a conventional loan.
Set it up for the 30 yr fixed, easier to qualify for as you need to qualify for both payments from your current home and the new home.
Once home is completed and the OTC loan is now converted into a fixed 30 yr, you can do a simple refinance wich will open you up to any bank with multiple products, you will have plenty of equity BUT you will have to pay closing costs again.
HERE IS THE WORK AROUND!
When you accept the OTC ask for premium pricing of the loan to cover ALL closing costs including escrows. This rate should be about .50% higher (max pending area you live in) but will pay for all your fees from the building loan and the purchase part of the transaction.
Premium pricing is opposite of buying points for a lower rate, you get points for a higher rate. and with a loan of 417,000 1 point = 4,170 in closing costs.
You will pay a higher interest rate (about 5.25-5.50%) but only for a few months untill the refinance is completed.
Down side, If you live in Florida / New York or other high costs states you must pay stamp taxes or other state/county refinance fees.
I actually do have such a lender that does an OTC and the 30 year fixed, looks like the interest rate today is 4.675 on that, at least that's the mortgage rate that locks, don't yet have the details on the rate during construction but I'll ask.
I like your idea of the premium pricing if it covers ALL closing costs, and I think most construction loans around here have so sort of 1% origination fee off the 417,000 right at the start (unless what you are talking about is an extra 1% beyond the origination fee).
So you're saying if I do that and refi in a couple months, the new lender I refinance with won't charge closing costs?
Totally get that the closing costs double dip if I refinance once the OTC converts, but I'm having a little trouble grasping the work around, but I think that is exactly what I want -- The power to switch to a different lender right after the mortgage starts without paying the closing costs again.
I was trying to find a way to do construction loan with one lender and have my choice of the mortgage lender but no one ever seems to have ever seen it done that way. Everyone tells me that the construction loan into the conventional fixed loan is always a package deal.
I definitely would rather not lose the funds refinancing.
The issue I have seen lately is I have only local lenders willing to fund the construction loan. However they then require that the mortgage following construction ALSO be through them. Their rates are not as good as some online competitors (For example, PenFed's 15 year is a 3.25 and the best local lender funding construction is a 3.5 - PenFed also has the 15/15 ARM with up to $10,000 in closing cost assistance which I'm not going to get locally). So in order to get one of those rates and fund the construction loan I would need to refinance to get out from whatever bank funds the construction and initial mortgage.
My buyers agent and all local lenders seem confused when I say I want to fund only the construction piece and then when the mortgage kicks in that I want to get a better rate elsewhere. No one seems to ever have heard of doing anything but the construction AND the following mortgage from one bank in the same transaction.
My idea was to pay for premium pricing for the OTC loan and reduce the fees to as close to zero as you can, It is possible! Then refi to the lower rate at your preferred lender.
Some of the fees you will have to pay upfront but you can get refunded at closing.
Okay, I'm starting to get the picture now. So apparently this concept of "premium pricing" is not something they typically advertise, but a crazy high interest rate but very few closing costs. And that you even get fees refunded at closing for choosing this higher rate.
In other words, the perfect loan for someone who intends to immediately refinance, to protect yourself from paying closing costs twice.
Never heard of this before but definitely a tool to have in the arsenal when negotiating if my end goal is refinancing with an online bank with a better rate.
I definitely would rather not lose the funds refinancing.
The issue I have seen lately is I have only local lenders willing to fund the construction loan. However they then require that the mortgage following construction ALSO be through them. Their rates are not as good as some online competitors (For example, PenFed's 15 year is a 3.25 and the best local lender funding construction is a 3.5 - PenFed also has the 15/15 ARM with up to $10,000 in closing cost assistance which I'm not going to get locally). So in order to get one of those rates and fund the construction loan I would need to refinance to get out from whatever bank funds the construction and initial mortgage.
My buyers agent and all local lenders seem confused when I say I want to fund only the construction piece and then when the mortgage kicks in that I want to get a better rate elsewhere. No one seems to ever have heard of doing anything but the construction AND the following mortgage from one bank in the same transaction.
Of course they want the end product. Did it ever occur to you that is why the One Time Close is even offered? The money made during construction for 90 to 180 days is nothing compared to the 30 year loan. I think it's nuts to chase rates, especially since you don't know what they will be when the home is finished. But, if that is what you really want to do........get your one-time close.......go with someone that will let you build under interest only 7/1 or 5/1 ARM (because long term locks during construction are are very cheap). Chances are you'll pay prime + at interest only while building. Find someone that will let you modify into a fixed after completion of construction. Then, when it comes time to modify, compare your fixed locked rate with your construction lender with other lenders. Get an estimate from the other lender and show it to your construction lender. Odds are with you they will try to salvage the relationship and make it worth your while not to refi. You just may be able to have your cake and eat it too.
Thanks, I really appreciate the advice. My builder thought I was nuts for chasing down financing right now also, I guess typically since the construction loan is the same 3.99 everywhere no one really cares until the time to pay the actual mortgage and THEN is when the rate matters.
There is one local lender with an OTC coupled with a 30 year rate lock, though it's a tenth or two higher than the usual for the benefit of not having the uncertainly of the rate 5-6 months from now.
From what you're saying is it's better to just do the construction now, gamble on the 30 year rate, and when you're a month or so out from moving into the new house, see what your current lender wants to give you for a rate, and also shop around.
My take was that I was sort of locked into the mortgage coming from the bank who writes the construction loan, but if I'm not beholden to them at all, then maybe I can have my cake and eat it too, yes?
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