How Should You Structure A Construction Loan?
Quite often you want to purchase a house that is in the desired neighborhood and the best school district in Las Vegas. Maybe it has nice bones and lots of character. On the other hand, is old and to put it mildly a little dated. You may want to change the floorplan. Open it up. Remodel the bathrooms and or the kitchen. If needing code changes, then plumbing, electric wiring and maybe the roofing. In the ideal situation, you would like to finish the basement and the attic. Or maybe to landscape the yard differently including adding a pergola and possibly to build an outdoor kitchen.
The first piece of advice will be to do only the improvements that increase the house value. In this respect, you may have to give up over the top upgrades. Second advice will be to look at the comparable price in your neighborhood. Make sure your improvements will not push your house price beyond this amount. You may not recuperate your additional investment if this is the situation.
More importantly, think about how you will finance all these improvements. Costs may begin to pile up. For most, you may not be able to perform this extensive remodeling only out of your savings.
Let’s analyze your options in terms of financing your home remodeling.
Option 1: Construction loan as part of the mortgage
You can apply with your lender to include the amount needed for repairs into the total mortgage loan. This will include a teardown of an existing building or major renovation construction of an existing building if needed. You can make things easier and simplify your finances since you will have only one payment to make. The whole cost wrapped into one loan against the home will have some tax benefits. A conforming loan amount will require you to pay mortgage insurance. The Jumbo Loan Amounts will not have mortgage insurance required. During the construction period, you will be required to pay interest only payment on the loan. After completion of the construction, the same loan converts to a permanent loan where you will pay principal, interest, taxes & insurance. The terms of construction can be offered at 6, 9 or 12 months. Jumbos can be offered at 12 mo, 18 mo & 24 mo. Down payment amounts will vary based on credit score and loan amount applied for. Credit scores will need to be in the good to excellent range. Can range from 700-760 depending on down payment needed and loan amount needed.
Option 2: Home Equity Loans for a construction loan
Home equity loans will require a second mortgage on your home. A home equity loan has a fixed interest rate for the entire life of the loan. You will receive the borrowed amount in one lump sum if using a home equity loan.
Note that home equity loans can be also quite pricey, similar in this respect to the primary mortgage loan. Besides, pre-payment penalties may be included in the contract so read it carefully, including the small print.
Option 3: Home Equity Line of Credit (HELOC) for a construction loan
Similarly, a HELOC works like a regular credit card and are also a 2nd mortgage on your home. You pay interest only on the amounts spent not to the entire amount you can tap into. The interest rate for HELOCs are adjustable so depending you might end up paying more. Usually your access to this revolving line of credit for 10 years. After this withdrawal timeframe, you probably have regularly 20 years to pay the loan in full.
Option 4: Low-Interest Credit Cards for Small Projects
If you have access to 0% interest or low-interest credit cards you might consider them. They can be a tool to finance small projects that do not exceed $15,000. Again, crunch the numbers for you will have to pay the loan back in 12 to 18 months. Otherwise, you will end up paying, after the expiration date high-interest rates. Don’t forget that such loans give you no tax benefit.
Option 5: Personal or Unsecured Loans
For medium-sized projects, ranging between $15,000 and $50,000, you can also use personal or unsecured loans. With these loans, collateral is not required. You can obtain a higher amount than by using a credit card. But you will pay higher interest rates in comparison with HELs or HELOCs.
If you feel lost among all these options don’t hesitate to contact Casey Moseman
at All Western Mortgage. Therefore you will get the best advice on what kind of loan works best for you. We also have an option for fix and flip loans