What type loan for building our new house?

indygalNovember 15, 2007

We are planning to build a new house as soon as we get our financing arranged. We will pay 50% to 60% of the total cost from our own funds. The remainder will be paid when we sell our current house. Our house has no mortgage. We do not plan to sell the current house until the new house is built. Should we get a home equity loan or another type loan? It seems there would be less hassle if we just borrowed against our present house, but would that end up costing us more money in the long run?

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zone_8grandma

Personally I'd get a construction loan. It gives you some leverage when the builder wants a draw for something started, but not finished. The bank can be the "heavy".

You can pay off the priniciple of the loan each month from your own funds. (Thus avoiding interest expenses). Once the house is completed, if your old house doesn't sell immediately, you wouldn't be scrambling for financing. These days, most construction loans can be rolled over into conventional mortgages once the house is completed.

Since you plan on paying it off, you'd want to be sure there aren't any prepayment penalities.

    Bookmark   November 15, 2007 at 10:39AM
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indygal

We're considering a home equity loan or a construction to permanent loan. We have enough set aside to make payments for however long is necessary. I think we have to spend our own money before the loan money becomes available to us. At that point, the bank would become the "heavy". However the builder's contract stipulates the payment schedule. He told us this is not the way that banks usually handle building loans, but he always does it this way. The man has been in business for a long time and has a wonderful reputation. I know that can change.

The builder's contract gives the following payment schedule:
1. Purchase lot and buyer gets deed to lot.
2. XXXX when house is framed and roof is blacked in.
3. XXXX when plumbing, wiring, heating are roughed in and the exterior veneer, or drywall is installed.
4. XX at time of completion of home.

I didn't mention that this is a brand new subdivision with a few models to choose from. All exterior materials will be the same on every home.

    Bookmark   November 15, 2007 at 11:37AM
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zone_8grandma

I think we have to spend our own money before the loan money becomes available to us.

That makes no sense to me. We sold our house, moved into a rental and placed the funds from the house sale into an interest earning account. (Although we didn't have enough to fully pay for the new house, we did have over 50%). We then took out a construction loan for the full amount. When the foundation was poured, the builder requested the first draw, we signed for the draw, the bank paid the builder and sent us a statement. Which we paid in full from the house funds. We followed the same procedure until the house funds were nearly gone (thus avoiding carring interest charges). Once we reached that point, we then paid the interest charges until the house was completed and the loan converted to a conventional mortgage.

    Bookmark   November 15, 2007 at 1:01PM
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