It’s a great time to finance your new custom home or remodeling project. The economy is strong, interest rates are down and lenders are ready to offer loans to the right homeowners.
While cash is always an option, there are 3 other types of loans that are typical in residential construction.
Option #1: Home Equity Loan
Smaller remodeling projects are a traditional, and typical, use for a home equity loan. HEL’s can really be a good choice for a remodeling project in which the homeowner has built-up equity. The loan amount is based on the current appraised value of the home and usually allows the Homeowner to borrow up to 80% of the appraised value. The HEL is paid back over 15-30 years, with a fixed interest rate. The benefit of a HEL is that you have the same tax deductions as a regular mortgage, a fixed payment the entire life of the loan and no closing costs that are typical of a refinance. The drawback is that HEL’s generally have a slightly higher interest rate than a conventional mortgage.
The best part of considering a HEL & remodeling you home is that it saves you from having to go through the time, hassle, and expense of moving. It’s worth it if it keeps you in a neighborhood that you love living in, too. Austin’s real estate market has been changing over the years. Many homeowners that love their neighborhoods often feel that they have to give up location for an updated home they can afford. With a HEL, you can use the equity you have already built-up and stay in the location you love.
Option #2: The Construction Loan
Construction loans can be used for new construction and large scale remodels.
Construction loans are an interim form of financing. The term is usually 12 months, or upon construction completion, at which time the loan will be converted to a conventional mortgage. The loan amount is determined on the appraised value of the completed project, generally between 70-80% of the value. In the event this is for a remodel or the lot had been previously purchased the lender will pay-off the first lien holder as well. The drawback to a construction to permanent loan is that you must qualify for each loan (construction and perm) independently of each other.
Option #3: A One-Time Close Loan
A one-time close loan allows you to purchase either land, or a property requiring a large-scale remodel, with the intent of building or remodeling right away. This loan gives you construction financing that automatically converts to a conventional mortgage once the work is all done.
While you only pay closing costs for this type of loan once, it is essentially the same cost as the construction and permanent loan combined. The benefit however is that you only need to qualify for the loan once.
Finding Your Loan
Believe it or not, it can be better to look for a builder first, and then seek out a loan, even though this is the opposite of the process that most people go through when they’re seeking to simply buy a house. This is especially true if you’re confident about the strength of your credit profile, since a strong credit profile allows you to work with most lenders without issue.
You see, every builder has preferred lenders that they work with. This relationship works to your advantage, because banks want to know who will be doing the work. They’re lending you the money against the value of the finished asset, and a builder who flubs the work could leave them with something that’s ultimately either worthless, or worth less than is projected.
So banks like working with builders who they know, like, and trust, and who know, like and trust them in turn. You’ll find the process of obtaining your loan greatly expedited by going through one of your builder’s preferred lenders.
So stop worrying about getting that loan. Call Soledad today if you’re looking for a custom home builder or remodeler in the Austin, TX area. We’ll discuss how we can help your vision come to life, and we’ll help you find the perfect lender to support the project.
Here are links to a few banks/lender that we have enjoyed working with in Austin: