Thinking of doing construction? Sooo Show you the money! I can show you the money, but first you need to know your best alternatives and the process involved.
First you have to decide what you are looking to do to your home. Are you looking to do an expansion, a knock down and rebuild, a kitchen upgrade etc…. Once you decide what you want, the next step is to get architectural plans, select a builder and get a good best estimate proposal of the costs to complete your project. A review of the cost of your project, existing equity in your home, and your liquid savings will help you choose the best type of financing options available to you. The most popular options are as follows:
1. If you have enough or substantial equity, and the project is relatively small, you can cash out and use the funds to complete your project. You can either refinance a first mortgage or take a 2nd mortgage home equity line.
2. If your project costs outweigh the available equity in your property, then a construction loan would be the way to go. Construction loans are based on the expected appraised value and in this case allow you to get “water from a stone.” There are many different types of construction loans and can be bucketed as follows: a. Fannie Mae Homestyle or a FHA 203k which is closed as one loan that acts as a fixed rate loan and disburses the construction costs in phases. The rate is locked and does not need to modify into a new loan. Loan amounts are limited B. A standard construction loan which gives you an ability to borrow larger amounts and is typically an interest only loan for the first 12-18 months and then modifies into a fixed or adjustable rate loan.
The main components to consider are how long the project will take and the best way to manage rate risk.
Although owners of homes generally do construction for ideal living, reaping the benefit of equity appreciation can be icing on the cake to a finished construction project. If you don’t have a construction background, it is highly recommended that you find a quality inspector, contractor or handyman and realtor to help you decide what to remodel, how long it will take and how much it’s going to cost. Don’t forget to add extra for unforeseen set backs like rot damage or plumbing problems which can’t be seen until after you start construction.
Carl Guzman, NMLS# 65291, CPA, is the founder and President of Greenback Capital Mortgage Corp. He is a residential financing expert, and a deal maker with over 25 years’ experience. Carl and his team will help you get the best mortgage financing for your situation and his advice will save you thousands!
By Carl Guzman
