Which construction loan would you choose?

sweet.reverieJuly 30, 2012

I am not sure which program to pick!

1. One close loan: We would close on the loan before we even started construction. It would essentially be a 31 year loan. The first 12 months is interest only on the draw and then at 12 months it rolls into a 30 year fixed. The rate is locked at 4.5%. There is a 4 year prepayment penalty on the loan (that penalty is 1% of the loan amount). The interest rate is set by a committee at the bank- not tied to any index.

2. Two part close. A 9 month interest only on the draw loan at 5.75%. At the end of building, you refinance the loan into a 30 year fixed and then pay a second set of closing costs (of course some items you do not pay twice) at current interest rates.

My thing with the first loan is that the interest rate is higher than what we might get if we wait (or it may be same or lower, who knows!) and the prepayment penalty makes me nervous. But the one time close seems like a nice stress reducer.

The fed as forecast that they will keep interest rates low "through 2013". I am thinking we will break ground in October and move in next summer.

Which one would you choose and why?

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gaonmymind

Can you take the first one and get a float down? We chose one time as I like certainty and don't want to deal with a second closing... market is too wild in GA. I am stressed enough and don't want the market or appraisal looming over me. I know Athensmomof3 did a second close, but I think it is because she ran into appraisal issues.

We locked at 4.1 and have a float down if rates go lower during construction.

    Bookmark   July 30, 2012 at 8:31PM
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kirkhall

Rates won't go much lower than 4.5% (yes, they are lower now, but they aren't that much lower). What is the difference that you will save in interest if you go with the 4.5% now versus the 5.75 plus, say, a 3.75% in a year? And, is it more or less than the extra closing costs for a second close? (Likely, it is a wash, really or even better to just do 4.5% now. Origination fees often are around .5-1% of a loan alone, for example).

The prepayment penalty is to prevent you from immediately refinancing at the end of your construction (into a lower rate).

    Bookmark   July 30, 2012 at 8:34PM
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sweet.reverie

Gaonmy mind: that is a good rate! She said we would get a lower rate if the committee voted to lower the construction rates during construction (this whole not tied to an index thing and voted on by a committee is also kind of weird).

I think I should go with the one time close just for the stress factor. I think I would be so worried about the appraisal and the interest rates the entire build.

    Bookmark   July 30, 2012 at 10:51PM
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gaonmymind

Yeah we were happy with it. It is higher than if we bought a resale but a great CP rate. I thing 4.5% is a good rate and like you said the stress alone might be worth it. Not sure how much your build is, but like kirkhall said you would be a wash IF rates went lower once you pay the second close. Plus you won't have to worry about appraisal and bring cash to the second close if the market get funky.

    Bookmark   July 30, 2012 at 11:28PM
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sweet.reverie

It is a 300K build. The closing costs for the 2 part loan are high too - 15K. Then I have to pay another closing costs! I just feel a little sad possibly missing out such low rates but I don't have a promise either way. I read a bunch of forecasts and many think the rates will be 4% or so. So is .5 worth the wait? I don't think so. But it is still a hard choice.

    Bookmark   July 30, 2012 at 11:54PM
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Beth Parsons

We faced a similiar decision and ultimately chose a 2 time close. The single close loan was locked at 4.5 for 30 years, no option to float down and closing fees that were approximately 4% of the loan balance.

We are building at an adjustable rate that starts at 4.2%, paid 1.5% of the loan amount for closing (basically just a 1% origination fee + assorted bank charges) and will get a discount on the 2nd close if we use the same bank for the permanent mortgage. I do have a healthy fear of what the final appraisal will be and the possibility of having to being cash to the table to close but we thought it was worth the risk to lock in a lower rate for the final mortgage, which should be around 3.5%.

    Bookmark   July 31, 2012 at 12:11AM
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