It goes without saying that building a custom home is a significant financial commitment. In some cases, the financing of the home can be quite complicated, using a web of finance options to secure the land, pay for contracting and design services, then finally closing on the home itself. It may seem like an overwhelming task, but with a little planning, you should be able to navigate the financial waters of this project with relative ease.
Different Types of Loans
Something we are seeing today is that homeowners are often using construction loans to pay for the initial costs of building the home. These are short-term loans, often with a higher interest rate, but then these loans are then folded into the mortgage and paid off immediately after the mortgage is secured. You can also use a construction-to-permanent loan. This will convert into a traditional mortgage loan once the home is completed. Both types of loans have advantages and disadvantages, so this may be something you want to discuss with your financial adviser.
Your budget is something we have mentioned number times, and for good reason. When you are developing your overall budget, it must include more than just the construction costs of the home. It needs to include a contingency fund, permits, interior finishes, and consultant costs.
We often talk about creating your forever home, but that does not mean that this home is not an investment. You want to design a home that is forward-thinking so that if the time ever comes when you or your heirs need to sell the home, it will still be attractive to future buyers and offer a high ROI on your “investment.”
As we have noted, these projects take time to complete, so you do not want to stifle your cash flow in order to have a custom home. Your loan disbursements should take place over the projected timeline to minimize interest payments. Taking the money too soon could result in excessive costs, driving the overall cost of the home up. Additionally, delayed funding means it could halt construction, putting the project behind schedule.
Research Your Lender
We don’t expect you to haphazardly choose your builder, and the same caution should be used when picking a lender for your construction and home mortgage loans. You want a lender with experience on these matters so as not to put you in a tough spot financially. Again, this is something you can lean on your financial adviser to help.