Build your dream home with a construction loan
With the current economic trend driving home prices down, many assume that buying a used home is worth every dollar they spend. Others turn to apartment loans, thinking it’s like killing two birds with one stone: owning your own home and earning some extra money through rental income. While these are all great strategies, some families choose to take out a construction loan and build their dream home.
Although it may sound difficult, building your dream home is possible, as long as you understand how a construction loan works. Currently, the construction-to-permanent loan remains the most popular option. This loan covers the entire lot and construction coverage, and even converts to a mortgage once your dream home is established. Once you’ve established the down payment, all you have to do is make interest-only payments at a fixed interest rate. And once construction is complete, the loan will convert to a 15- or 30-year fixed-rate mortgage.
Certain banks will offer interest reserve accounts that allow you to make interest-free payments throughout the construction process. The bank will calculate the amount of the interest-only payments and add the total amount to the overall loan. The funds will be deposited into a different account, which makes it ideal if you currently have pre-existing rent or mortgage payments on your plate. The licensed contractor you have hired will establish a “release schedule” detailing the monthly construction schedule with the necessary funds in tow.
Once you’ve determined that one of these new home construction loans suits your tastes, there are five quick steps to get you on the right track:
1. Know your limits of affordability
You must determine how much of the total loan you can afford using an online loan calculator. Remember that you need at least 20% down payment to avoid PMI payments.
2. Find lenders
Compare current loan rates from online lenders and local banks. Ask a building contractor accredited by previous lenders they’ve worked with and get their contact information.
3. Get pre-approved
Read the pre-approval process of each selected bank. Describe closing costs and estimated tax rates. Ask for a copy of a prior approval letter.
4. Find a contractor
Choose a reputable contractor who is licensed, insured, and experienced in building new homes. Calculate a budget plan, construction costs and architectural drawings to get your house project off the ground.
5. Select the Terrain
Hire a reputable real estate agent to identify a suitable piece of land within your budget. Check all possible building permits from your local municipality and make sure a water and septic system is available.
Once you have all of these five steps pinned down, you are ready to build your dream home!