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this thread.)
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Originally Posted by Felicity
Ooooh...yes...need that info, big-time! Thanks!
We're covering the land purchase with a home equity loan...then when we go to build....what's the process? Just get a new home building loan...start building the sucker, put our current house up for sale a couple of months before the new one is finished and hope we sell at the exact right time so we aren't "homeless" or carrying two mortgages for too long because we had to roll the construction loan into a second first mortgage...??? Any suggestions would be so appreciated! Please, tell me what you know, because really--I know nothing about it.
BTW--Both hub and I have great credit and our current house will sell for about 2/3 of what the new home will cost to build. And the equity we have is from a 5 year old appraisal when we re-financed and several improvements on the current house have been made.
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Construction Loans typically work a bit differently than conventional mortgages, they are more similar to a Home Equity Line of Credit.
Basically, once the construction loan is closed, there will be an initial dispursement of funds to the contractor. For Example, say you have a $300,000.00 construction loan, the builder will typically want money to start. Say he asks for $60,000.00. You will close the loan and take an inital "draw" of $60,000.00. Normally, during this initial draw, you will be required to purchase the land you are building on. However, in your case, you already own the property, so it doesn't matter. The builder will then spend that money, and down the road ask for another draw. Here in Wisconsin, you have very little to do with any of that, the builder simply works with the Title Company to get the funds when required.
As far as your payment is concerned, contruction loans are typically interest only based on the amount you currently have borrowed. So, in the case above, your payments would be based on a $60,000.00 balance, interest only, until the builder requests more. This should help you pay your existing mortgage, as your payments will be lower than if it was amortized over a specific period of time.
Be careful, however, as often there will be a set number of free draws and the title company may charge you for additional ones. I have seen fees for this range from $50.00 to $500.00 per draw. Each draw can be multiple checks, but each seperate instance of the builder requesting money is considered a draw.
To clarify, your builder requests a draw for $60,000.00 on March 1st. He wants $30,000.00 for himself, $20,000.00 for the excavators, $5,000.00 for the utility company, and $5,000.00 for permits. This would only be considered one draw. However, if he went on March 1st and got himself a $30,000.00 check, March 3rd to get a $20,000.00 check, etc. they would all be considered seperate draws.
Once you have completed your home, you'll likely have to refinance into a different type of mortgage. The only exception would be if you happened to utilize a "One-time Close" construction loan program.
Depending on how quickly homes sell in your area, I would plan accordingly. Ideally, you'll be able to time it just perfect so that you can move out of your old home and sell it just as your new one is finished. However, it is very unlikely that it happens that way. Even if it does, it is likely that the buyer of your home will take that into account when putting the offer in, and you may potentially get less than what you would have for your home.
One option you may want to consider is giving your current home plenty of time to sell. If, in fact, it does sell before your new home is completed, would it be possible to stay at a friends or relatives house for a short period? If it isn't are there any apartments that offer a month-to-month lease in your area? You would want to make sure you keep in mind the cost of the apartment/storage vs. what you would be paying on your mortgage or how much less the seller would offer if they had to wait to move in, but often times it will be better to be "homeless" for a brief period rather than carrying an extra mortgage payment until it sells.
Another advantage of selling your home prior to your home being completed would be that you have the cash in hand, and can apply it to the new property before you refinance it into a standard 15 or 30 year mortgage. Providing you have the equity, you should be able to reduce-possibly even eliminate- private mortgage insurance.
Hope that helps a bit, if you have any questions, let me know!