Four Questions about Loans and the Secondary Market

sallen2008February 8, 2009

Question #1: We are within 60 days (hopefully) of completion of our new house. Up to this point we have had a line of credit with our bank that has been covered by other assets. We are now going to have to get a construction loan to cover us until completion when we can get our actual loan. We have been told by the bank that the secondary market (with a rate of 4.5%) requires the home to be completely finished before we can get a loan with them. That means we will be getting a construction loan for 60 or so days. Attorney fees and bank fees for the construction load will be around $1,000. The bank tells us that if we go through them for the secondary loan they will forgo the $500 fee to help us with the secondary loan and that the secondary company will work with the same lawyer to update the account records so the fee for the secondary loan will be greatly decreased. Are we going in the right direction and do you think this is the way to continue?

Question #2: Will it be best for us to go through out local bank to get a secondary market loan? Why or Why not?

Question #3: We want to pay additional money down on our loan when we are able to sell the home we are currently living in (we have not placed the home on the market yet). Are there any details in secondary market loans that we should look for that would prevent us from making a larger payment on the loan hopefully months down the road? Are there any other contract items that we should be concerned with on the secondary market or items that we should look?

Question #4: This will be the first home we have ever financed and this will be the first home we have ever sold. My brother, sister and I sold the house we inherited from my mother two years ago. Was that considered the first house I have sold or will the home I am living in now be considered the first house I have sold? Does it matter?

Thanks, this is our first home loan and we really hope to get it right!

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Hi Sallen,

OK... there's a good deal of confusion possibly occuring from the mortgage financial world's jargon.

The "Secondary Market" is the level of banks that buy bundles of already-closed mortgage loans... you, as a borrower, wouldn't have any direct contact with the secondary markets.

The mortgage you will get when your new home construction is complete is known as your "permanent financing." Another industry term for it is a "takeout mortgage" (because it 'takes out' the line of credit funds previously in place to pay the contractors as they did their work.)

OK... let's cover your questions now;

Q1; Yes, you'll save some transaction costs by having the same bank and service providers manage the construction line of credit *AND* the final permanent financing (takeout mortgage.)

Q2; That's a "maybe"... and the difference is not likely to matter much. Only after you've accumulated some real estate equity will you be in a position where your financial structuring will really matter... so no worries at this point.

Q3; Permanent financing terms are currently most often conforming loans, and generally have no restrictions agains early payoff in part or full.

Q4; 1st or 31st doesn't matter as far as the financing is concerned.

Hope that's all helpful.
Dave Donhoff
Leverage Planner

    Bookmark   February 8, 2009 at 4:02PM
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dave_donhoff, thank you for your quick reply. My bank has been helpful to this point and I am happy to hear that I can continue that relationship. My question concerning the 1st house, etc. is more of a tax question. Will the house we are living in now be considered 1st home or 2nd home. I have lived in the house since I was in elementary school. I did not take ownership until about fifteen years ago, so hopefully that will help with capital gains?????

    Bookmark   February 8, 2009 at 5:22PM
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I think if you want to be very sure, ask the bank or your CPA, as they are the ones with answers above and beyond the generalities you asked about (outside of the 1st/2nd home thing). It's possible your state or even municipality has different rules for some of these things after all.

    Bookmark   February 8, 2009 at 6:33PM
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