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Construction Loans rates
as low as 3.5%
Lot Loans
rates as low as 4.5%
The 6 Wins to
Building with a Home Construction Loan
by Reily Kirkpatrick
March 27, 2011
Lower
your Cash Out of Pocket by Maximizing the Loan Amount
By
far the greatest benefit is getting a loan amount which can be
based on the future or “As-Completed” value of the home. That’s
right; you can get equity credit for a home that doesn’t yet
exist. In many cases this means you can finance 100% of the
construction cost and need little or no money out of pocket.
Your new loan may also cover many of the costs you paid before
construction begins; soft costs, such as architectural and
engineering services or building permits.
Lower
Interest Rates Equal Higher Total Savings
The Single
Close Home Loan has gained wider exposure and is often the best
way to ensure the greatest interest savings over the life of
owning your home. Many homeowners are unaware of all options and
wrongly rely on a home-equity loan, either as a long-term 2nd
mortgages or to be replaced with a higher new 1st
mortgage when the home is complete. These may be workable
options when rates are falling and home values rising, but many
of America’s largest banks and financial institutions have
slashed the amount they lend as home values have fallen and
interests become less stable. In fact, loans based on the Prime
Rate index, have seen lows of 3.25% and highs of 19.5% over the
past 20 years. Simply, the Single Close loan eliminates this
risk and often means interest savings totaling tens of thousands
of dollars.
Fix
your Monthly Payment by Locking-in your Rate Up Front
One of the
most attractive features of the Single Close is the ability to
lock-in a low interest rate before construction begins
and have no change in rate once the home is complete. This
advantage can NOT be overstated. Fixing your rate for the long
term can translate into a mountain of interest savings, both
during construction and over the life of your loan. In today’s
turbulent economy most are unwilling to risk waiting until their
home is complete before locking in a permanent loan. To be sure,
no major lender will refinance your home while under
construction; hard money at rates between 12-14%, a 4-10
points may be the only option. The Single Close is a smart way
to remove the stress of scrambling to refinance after your home
is complete, when rates may be much higher.
Builder Selection – Make use of your Lender’s Highly-Tuned
Process of Due Diligence
Alarmingly,
too many homeowners are willing to bet most of their life’s
savings and a good portion of the family’s future earnings on a
builder they know far too little about. References provided by a
builder or the good word of a neighbor are never enough
on which to jeopardize your family’s future.
A
significant advantage to using a construction loan, which can be
of extreme, yet unforeseen value should the worst case
materialize, is the lender’s review and acceptance of your
preferred builder. The lender’s aim is simple; weed out risky
candidates so as to maximize the likelihood your home will be
completed on time, within budget and allow loan repayment as
agreed. Most construction lenders use a well-honed system of
gathering and reviewing independent, third-party documentation
of the builder’s construction experience, background, credit
history, trade references, business licenses and the proper
insurance. No homeowner who goes it alone has access to the all
the research and screening tools, investigative experience or
staffing to properly conduct a complete builder review.
A
Project Feasibility Study Can Ensure Proper Funding for Your
Project
The lender’s
Project Review begins with an integrated analysis of your
property’s appraisal report, building plans and specifications,
construction contract and a detailed cost break down. It ends
with answering a question of paramount importance, “Can the home
as defined by the building plans be built for the amount
represented in the contract and thereby result in completion of
the home described in the appraisal report, there by ensuring
that the lender’s (and borrower’s) collateral position are
sound?”
Homeowners
must be sure the entire cost of construction is covered in the
contractor’s signed budget. Patrick Cunningham of C & C
Partners in Los Angeles, California, one of Southern
California’s premier Design / Build firms confirms that a great
way to ensure the financial viability of your project and
choose between competing builders is by laying their respective
budgets down side-by-side to identify which components may have
been omitted or offer too little detail to be properly analyzed.
The final point to be made here is that home construction is a
complex process and you are well –served taking advantage of the
decades of experience a good construction lender can provide.
Construction
Fund Control Prevents Misuse of your Funds and Attempts at Fraud
Fund Control involves an established set of checks and balances,
draw request procedures, site inspections and continual
budgetary reviews designed to greatly reduce the opportunity for
the misuse of construction funds and the possibility of property
title liens by subcontractors or material suppliers for
non-payment.
It may seem
odd to submit periodic requests for funds you’ve borrowed.
However, for your protection and that of the lender the builder
must demonstrate that the funds being requested are for work
completed or materials received. The draw process works to
ensure the builder is using your funds on your project,
not paying for materials or labor on some other project or
diverting them for personal use.
While
builders typically request funds every 3-4 weeks, the draw
process must be flexible to accommodate a pace of construction
that often moves in spurts where activity may be heavy some
weeks and a little slower others. A good fund control group is
prepared to adjust to the needs of each individual project and
see that the flow of funding keeps pace.
Written by Reily Kirkpatrick
March 27, 2011
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