Here are the basic types of loans that you will be dealing with when choosing a loan for your new home building project.
Finding the right loan or loans for your building project could feel like a balancing act. Here are the basic types of loans that you will be dealing with:
Bridge Loans are short-term loans designed to span the monetary gap between the closing of your new home and the closing of your current home. As the name implies, this type of loan provides a financing "bridge" for beginning construction of your new home while you sell your current home. Your current home serves as collateral for the bridge loan. Typically, financial institutions charge a slightly higher interest rate for this type of loan, along with processing and administrative fees. Most residential bridge loans are written to last for six months or less. You have to be able to afford to carry the three loan payments: the old mortgage, the new mortgage, and the bridge loan, until the closing on your old home.
Construction Loans provide the financing for the construction of your new home. When you're building a new home, most financial institutions require you to take out a construction loan rather than a conventional mortgage. The construction loan is often blended into a conventional mortgage once the house is finished, in many cases without any additional fees. Under a construction loan, a builder receives "draws" from the bank as various phases of the construction is completed. The final draw comes when the house is completed. The number of draws depends on the bank and how much up front money you put toward the construction of your new home. Most banks charge a set fee for each draw. In addition, some financial institutions charge administration fees and a higher interest rate for constructions loans. Do You Qualify?
Your Conventional Mortgage is the type of loan you will likely have once your new home is finished. Conventional mortgages typically run 15 or 30 years, with the 15-year mortgage usually carrying a slightly lower interest rate. Most financial institutions will allow you to buy down your interest rate to a lower rate by paying points up front. Each point costs one-hundredth of the amount you are mortgaging. For instance, a point on a $100,000 mortgage would cost you an extra $1,000 as part of your mortgage application fees. Typically, each point that you purchase reduces your interest rate by a quarter of a percent. Conventional wisdom is that buying points is a good investment if you plan on owning your home five or more years. Each point can save you thousands of dollars in interest over the life of your mortgage. Points also are deductible in many instances on your federal income tax return for the year in which you take out your mortgage.
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