A client had called in last month and inquired about a construction loan for a major remodel project on her home. She was a busy woman running her own business and not quite sure if a construction loan was right for her.
I sent her an application with an analysis letter showing her a few options on the One Time Close Construction. I had followed up with her to see if she had a chance to review the information received and she was still undecided on what course of action to move in.
In the end she decided to get a Home Equity Line of Credit with her local bank. I have to wonder if this is the best option for her. She is not pulling out $20,000; she is pulling out $340,000 for a major remodel project.
A few things to consider when choosing a HELOC verses a One Time Construction:
- On a ONE TIME CLOSE CONSTRUCTION you will NOT have to make your mortgage payments during construction. Usually a contingency reserve is set aside for your mortgage payments to be paid throughout the construction period. DO NOT CONFUSE THESE FUNDS AS COSTS.
- Once you take a draw on your home equity line of credit, you will be place in a position where you will have to make 2 mortgage payments. You may also have to pay additional funds towards renting an apartment or living in one of your rentals during the construction phase. Ultimately you may be stressed to the limit cash flow wise.
- When using a Home Equity Line of Credit you have the ease of paying your contractor when needed instead of the contractor doing the work and having to wait on the next draw to receive funds. Also ease of funds if you are doing the work yourself.
- When using a Home Equity Line of Credit the contractor will have to work within the budget outlined however, it could easily go over the initial budget. You will not have to fill out special construction forms.
- With a One Time Close Construction there are contingency funds set aside should your project run over budget and there may be more paperwork than you care to handle.
- Consider the equity you have in your home verses the costs of the remodel. If you run out funds before your project is complete you may not be in a position to borrow more for completion. Lenders will NOT lend if your project is over 50% complete and you need additional funds.
- Not ready to give up that great rate you currently have on your first mortgage? You may be surprised to find out that your blended interest rate and total mortgage payments are higher than the interest rate/payment you end up with once your construction loan modifies into a permanent loan.
Remember I am only touching on a few items to consider, however construction loans have come a long way; the process is more streamlined than it was 10 years ago when I did my first construction loan. There are many factors to consider when weighing your options.
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