Can anybody explain how a construction loan works?

Money
1

I’m building a custom home with my gf in Arizona, we bought the land and have a builder. While I could afford to pay cash, I don’t want to tie that much money up and I don’t mind paying up to $2500 a month for a mortgage. I’m wondering how does the construction loan work and if it converts to a mortgage once the house is done. Does it operate kind of like a HELOC where I pull 100k at a time for the contractor? I’d rather not pay interest on the full loan if the money isn’t being used by the contractor. He said he’d have 4 or 5 requests for the money over 7 months or so.

Another idea is we’d fund the construction ourselves for the first 5 months and use the construction loan at the end. This would keep interest down a bit. I’m open to financing ideas, never built a custom house before.

2

I researched this 20 years ago but can’t remember shit about it.
We ended up buying new house already built.

3

Its been awhile since I did one, but you need to get approved for the full estimated construction amount. You will take draws from the available loan amount for each phase of construction. From what I recall they are:

  • Land clearing and prep (+ running utilities)
  • Foundation
  • Framing
  • Roof
  • Mechanical rough-in
  • Drywall
  • Finishes

It does effectively work like a HELOC in that you are only paying interesting on your draws. An inspector for the lender will come out after each phase to sign-off so that you can get the advance on the next phase.

After the last phase, you will want to convert your construction loan into a permanent amortizing loan. I would try and do both with the same lender to minimize costs.

I don’t know anything about construction in AZ, but my advice would be to allow plenty of time for permits and red tape.

4

Slightly off topic, but the inspector will be your most valuable person.

5

Agree with butler, at least that was accurate when I built mine several years ago. One thing to look out for is when you convert to a mortgage, keep your bank honest on the mortgage rate.

7

Thanks for the info guys. Guess we’ll apply for a loan of 80% the cost and really borrow about 30%. Maybe rates will go down over the next year but i kinda doubt it. I think 6% is the new reality and historically thats a decent rate. After tax deduction, i think i can make more than 4% on my money.

8

Apply for a loan for 90% at least, doesn’t cost if you don’t use it and it gives you a bigger cushion if you need it. The bank may limit to 80%, don’t know how it is now.

9

Buy the land in full if you can. Empty land normally has worse terms.

The reason is if you default, they just get the land.

1 Like
10

When I built, you had to have a clear deed on the land before the bank would loan a penny.

11

We paid cash and closed on the land just yesterday.

12

That’ll save you some cash. I have a friend that trying to buy land and they want 30-50% down

Does it have utilities? If not you’ll need to get those installed

13

City dug a well, has power and natty gas. Will need a septic tank and ill need Starlink for internet. Will be some cost in preparing the site, its on a small hill. But thats all figured into the build we’re putting together. Now i need to think whether 130k for a pool and hot tub is worth it, as of now im leaning that direction.

14

Utilities can be mind numbing expensive.

Is this your forever home? If so I’d do the pool.

15

Girlfriend thinks it is, im not romantic like that. Im inclined to build the pool but before the final go ahead i will make sure electric isnt crazy. I know we’re getting a small solar package, i may bump that up if it helps power the pool.

Every car or house i buy an important metric is will somebody want to buy it off me.

16

If you heat the pool. The solar will make a huge distance.

If you have enough land. Don’t mount them on your roof. Do them on the ground.

17

My guess is that if you are in Phoenix, Tucson or surrounds, you would probably recoup the money you spent on a pool because the pool is usable year round. If you’re in Prescott, Sedona or Flag areas, maybe not because those areas have some winter (some more than others). I’d look around at other area homes in your price range and/or review listings of homes for sale and see who does/doesn’t have a pool. Sometimes. pools can be a detriment to sale.

In addition to electric, find out how much water you will need for a pool and the cost and how often you need to change it. Around here, the price and availability of water can be a serious detriment to having a pool.

18

That’s why I asked if it’s his forever home.

Pools also cost a lot to maintain

19

May not be what you want or desire, I have a 24 foot round above ground pool that is used from mid April to early October.Also have a hot tub that is used October thru April.

Can save a lot of Money by having an above ground. Don’t know, maybe they are not too common in Arizona. I am in the Raleigh area.[NC]

20

Why is that? I have 3 acres of land but at least 1 acre is in a wash and not buildable. If it’s for aesthetics, this is going to be an adobe style house and the panels will only be visible from the houses that are higher up the mountain.

21

Easier to repair and won’t damage your roof.