Financing Your House

 

There is “green building,” which is about environmental friendliness, and there is “building green,” as in money.  You’re building green because you’re building a house yourself.

Arranging financing should be one of the first things you do in getting started.  You don’t want a surprise − not being able to get the amount of money you expect, or need, after you’ve done a lot of other work getting started.  If you have enough cash of your own to build a house, you’ll have to answer the question − pay cash or obtain financing?

Pay cash or get a loan?

 If you have the cash to build without need of a loan, you can save all of the costs associated with borrowing, as well as the substantial interest you’ll pay over the years.

You could opt for a loan anyway, if you don’t want to deplete your cash, or if you think investing the cash will earn more money for you than the loan would cost.

There is no right answer that fits all. If you are in a position to be making this choice, consult with a financial planner or accountant.

If you’re borrowing, determine the amount you qualify for on your long-term financing (mortgage).

Once you have a lender’s commitment for the mortgage, you will need funds to pay for the land purchase and the actual building of the house − a construction loan.

Construction Loans

 

A construction loan may be provided by your same mortgage lender, but it doesn’t have to be. This loan is a line of credit with a fixed maximum amount that you may borrow. 

You draw the funds gradually, to pay construction costs as you go along. You pay interest only on the money that you have drawn. There are three basic types of construction loans.

One-Time Close

 

This is the simplest type of loan because it is “all in one.”  A construction loan and mortgage is combined into one closing, with one lender, at one interest rate.

Note Modification

 

Similar to the one-time close, but may have different rates between the construction loan and the permanent financing.  Also, the construction loan rate could be fixed, with an adjustable rate on the permanent loan.

Two-Time Close

 

With this type of financing, the construction loan and the mortgage are two separate loans, each with its’ own closing.  The two-time has higher upfront cost, but it provides more flexibility.

Again, there is no right answer that fits all situations.  Consultation with your lender will provide the choice for you.