3 reasons why you end up paying more for a home loan

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If you have dreamed of building your own home, you will be surprised to find that construction loans are more expensive than housing loans. We’ll look at three reasons and discuss how to keep more money in your bank account.

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1. Property costs

When you build your own home, you can choose where you want it to be. Do you want land in the country? Or do you see yourself in a central part of the city? Are you planning on looking for land and paying it off before starting construction? Or find a lot and incorporate the price into your loan?

There are two ways to buy land before the home loan pays off:

  1. You are less likely to overpay for a ton because you are under no pressure to find one.
  2. You can use equity on site as a down payment or partial down payment.

How to save: If you are planning to finance a piece of land (or a building lot) under the home loan and include it in your mortgage, carefully look for the best location to build. You are much less likely to overspend if you are in no hurry to find a place to call home. Let’s say you find a great lot in a nice neighborhood for $ 50,000. If you convert it to a 30 year 3.5% mortgage, you pay a total of $ 80,828 on the property ($ 50,000 + $ 30,828 in interest). Imagine you’re in a hurry to find construction site, so buy a similar piece of land for $ 60,000. After 30 years, you will pay a total of $ 86,994, including $ 36,994 in interest.

2. Architectural plan

The mortgage lender requires that you have house plans ready. So if your builder doesn’t already have them, someone will need to create them before you apply for a loan. For this service, most architectural firms charge between 5% and 20% of the cost of the house, averaging $ 15,000 to $ 60,000 for a 2,700 square foot home, according to HomeAdvisor. Fees paid to an architect are considered a “soft cost” and can be converted into a construction loan. Since design fees are not a cost you incur in purchasing an existing home, it is worth thinking about ways to save money.

How to save: Consider pre-made house plans. They come in every style and size under the sun, and most companies will customize them for an additional fee. Pre-made plans for a 2,700-square-foot home start at around $ 1,000.

3. Short term construction loan

Not so long ago there was only a short-term construction loan and, after the house was completed, a classic mortgage. There are two credit processes – and two closing costs. You can still find lenders promoting this payment method and borrowers don’t always know that there are other options.

Since building loans are designed for short terms (usually less than a year), the interest rate is variable and fluctuates with the key interest rate. Because of the risks involved in financing a home, the interest rate is usually higher than the current mortgage rate. Depending on what happens to the key interest rate – the rate at which banks lend money to other banks – you could pay a pretty penny for a construction loan.

How to save: Instead of taking out a short-term construction loan followed by a mortgage, take out a single construction-on-permanent mortgage (also known as a “single-close”). As long as you take out a mortgage with a fixed rate loan, you know exactly how much your loan will cost and you won’t have to worry about fluctuating interest rates.

Building a house is exciting, but it can also be stressful. Planning ahead can save you money – and a whole host of headaches. So you can concentrate fully on the design of your dream home.

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