Saturday, June 23, 2012

Construction Loans

So the construction loan financing begins!

I have called three banks, all on the recommendation of someone who has used them. They are all local banks- which I have heard time and time again is the best way to go!

Bank 1. This bank has an essentially 31 year loan. We would apply, get approved and close on the loan all before construction begins. For 12 months, the loan is interest only then it converts to a 30 year fixed. All of this at a rate of 4.5%. That rate is good historically but about 1% higher than the rate we could get buying a house today. If we have equity in the house when construction completes, we could refinance and get whatever current rates are however that would mean paying a whole new set of closing costs.  "People" are saying rates should stay this low for maybe the next year. This makes sense to me since we are really seeing the market pick up and a lot of that is due to low rates. I am not sure whether this being an election year will help us or hurt us, but I would think with the economy being the issue of the hour, keeping rates low for a while helps everyone. But having worked in the finance industry for years, I know nothing can be predicted.

The branch manager at this bank was wonderfully friendly and I really liked her (we spoke on the phone). Which is a plus since she would be potentially holding my hand a lot over the next year!

The thing I forgot to ask is if the loan has the ability to have interest reserves. Basically, interest reserve are tacked on to the loan amount so you can your interest only payments come out of this account instead of out of pocket every month. This would really help us since we have rent to pay and towards the end when we have drawn a lot on our loan, it would be like two full housing payments, eeek!

So I will hear back from her on the interest reserves on Monday.

Bank 2. This bank has a one close as well but the first part is an ARM at 6% and then converts to 30 year mortgage at the end of construction. I did not ask about interest reserves with this bank either, waiting to hear back. The benefit to this is that if rates are low when we finish construction, we would come out on top without paying closing costs twice. But if some crazy thing happens and rates go above 4.5%, the other loan might have been a better deal. The woman I spoke with was also a tad condescending, which was frustrating. This is when looking and sounding 20 instead of 27 will hurt me. For owner-builders, which we might do (that will be another post) closing costs would be more.

Bank 3. This bank has a one time close as well with a rate lock however, they have the option to float down if rates go lower... I have not talked to this bank in person, just looked online so I will be curious to learn more about their program.

Basically we are very lucky there are so many banks still doing construction loans in our area! When the economy tanked, many banks dropped that business line because properties were not appreciating thus making it a big risk for the bank to finance projects on depreciating land. From all the people I have talked to, the person handling your construction loan plays a big role in how positive the experience is. So far, I just love the woman from bank number 1. So helpful and friendly and her branch is close to our building site, but I am not sure if that type of loan is the best one for us.

Our lot closes on July 25th, so I hope to have met, in person with people from all these banks by Mid July since our project start goal is as soon after the lot closes as possible.

So much research, so little time!

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