Financing New Construction
There are a multitude of ways for Buyers to finance the construction of a new home, including going through the builder (especially true of the bigger ones).
However, the two main choices from bank lenders are: 1) what’s called a “construction-to-perm(anent) loan”; and 2) an initial mortgage to purchase the lot, followed by a second mortgage on the new home.
The virtue of choice #1 is that there is only one loan and one closing, not two — and therefore no duplicative closing fees, transfer taxes, deed registration fees, etc.
Sounds good, right?
Fees, Fees, Fees
The catch is the interest rate on the construction-to-perm loan.
Namely, if it’s considerably higher than the rate on the “end loan” (option #2), whatever the borrower/new home builder saves on closing fees is more than offset in higher payments.
It’s also the case that going the “construction-to-perm” route requires the Buyer to submit home plans and spec’s to the lender.
Buyers who are eyeing a teardown but haven’t selected a builder yet — let alone an architect and home design — won’t have that info prior to closing on the existing home (essentially, a lot in the eyes of the lender).
