15 Construction Loan “Inside Secrets” To Building Your New Home
1. Which construction loans are available and which one should you apply for?
Home loan banking and the internet has changed the mortgage and construction loan industry forever. Today’s construction loan choices include the 30 years fixed, 15 years fixed, 1 year ARM, 3/1 ARM, 5/1 ARM, 7/1 ARM, 10/1 ARM and don’t forget the popular interest only loans.
The construction loan of the past was a short-term 1-year loan that the customer would have to refinance into a new loan once the construction was completed.
This two-time process cost the customer two sets of closing costs and you would have to re-qualify for the new loan once the home was completed.
The most popular construction loan today is the “One Time Close” but not all are created equal. Just like any product, there are the best loans, good loans and downright bad loans.
With today’s technology, you now have the ability to obtain a construction loan from the best banks in the country and sign your loan documents at your local title company or escrow office. This benefit allows you to have the most competitive construction loan available.
The loan that you should apply for is simple; ask for the lowest rate, one time close for a specific period of time that you think you’ll be living there.
2. Which lenders/banks have the best construction loans and what do you need to apply?
There are plenty of banks willing to lend money for mortgages, refinancing, home equity loans and every other type of loan. But if you’re planning on building a new home, where do you get the best construction loan with the most competitive pricing?
More importantly what is a good construction loan?
A typical construction loan nowadays is a construction to permanent loan that may or may not allow you to lock-in today’s low-interest rates until the home is completed. If you choose a loan that does not allow you to lock in upfront, the interest rate may end up higher along with your monthly payment.
The most important thing when searching for a good construction loan is to find an experienced construction loan specialist that knows which banks are the best.
The best banks can offer you a low rate now, upfront, before you start building your new home.
3. Should you go directly to your local bank or to a loan broker for your loan?
Most banks offer loans, and going to them is like shopping at a Ford dealer. The only thing you can get at the Ford dealer is a Ford. But what if you want choices?
One way to get different choices is to go shopping to every bank in town. Or you can call an experienced construction loan broker who has done all of the homework for you and has direct access to hundreds of banks nationwide.
A broker is a representative for hundreds of banks. Although the broker serves as middle-man, his or her services will not cost you anything extra. That’s because brokers get loans at wholesale rates, and pass them along to their clients at retail prices, just like any other business.
The difference between wholesale and retail is how brokers make money. Therefore, you get the same rate from a broker as if you went directly to the lender yourself.
In Fact, because or their volume, many brokers are able to offer their clients better deals than you can get by talking to the banks on your own.
With an experienced construction loan broker, you can shop dozens of the most competitive banks nationwide, work with wholesale pricing and can negotiate on rates and pricing.
4. Should you lock in your construction loan before you start building or let the interest rate float?
If the rates are heading upward, lock. If the rates are stable, relax. If the rates are headed downward, float.
Right now interest rates are at an all-time low and can only go up in the near future so make sure your construction loan is locked into today’s best interest rates with the ability to float downward.
Inexperienced loan officers will offer their customers an enticing low adjustable rate during construction without an upfront lock-in and the customer may end up having to lock into higher interest rates when the home is completed.
Or the customer is sold at a higher rate during construction with a float down option after the home is built. Again, the rate could be much higher when the home is completed.
Meanwhile, the loan officer has been paid and has moved on to the next loan. The only time you want this type of loan is if it’s the only loan you qualify for.
Most loan officers do not explain this to their customers until it’s too late (Closing).
Always ask. Is the construction loan rate locked upfront or floating during the construction loan period? Then ask, is the rate during the construction loan the same rate when the loan converts into the mortgage period.