One-Close Construction Loans Provide the Best Mortgage For Building a Vacation Home

Many people investing in vacation propertiesmeans that the customer knows what their
decide to build a new home rather than purchasepayment will be when complete, regardless of
an existing home. Choices they make may rangemarket fluctuations during that time.
from using an architect to design a dream homeThere are other benefits created by one-close
to simply finding existing plans and choosing aloans depending on the length of time the
builder. In all cases, the first decision is choosingproperty is owned. Since many people purchase
the land or lot itself.the land and build at a later time, their equity or
Once the location, plans, builder, and constructionappreciation during that time can work to their
cost have been determined, the next question toadvantage, as the loan to value determination is
answer is how to finance the construction. Thesebased on appraised value, rather than cost.
choices range from cash to mortgage financing. InFor example: a customer purchased a lot for
determining the best method of mortgage$200,000 that has doubled in value over time.
financing, a number of factors need to be takenThey now wish to build a home with construction
into account.cost of $600,000. The appraisal comes in at
Many banks offer construction loans, where the$1,000,000. Since the lender will finance up to
loan is set up so the builder can draw funds during80% of appraised value, there is $800,000
the construction phase. These loans have costsavailable. This will finance the construction, pay off
associated with them, typically construction loanany land loan, and include closing costs and
fees, inspections, processing, underwriting,construction interest in the loan, providing a true
appraisal, title, recording, and escrow closing fees.turn-key project with no out of pocket costs and
Interest during the construction phase is based onpayments starting when the home is complete!
the drawn amount and either billed to theHome builders also prefer this type of financing,
customer or taken from a prepaid reservebecause their own financial resources and credit
account.lines are not needed. Since the customer is
When construction is complete, the constructionfinancing construction, the builder does not need
loan needs to be paid off. This is typicallyto build in financing costs that would normally
accomplished with a traditional mortgage loan, oroccur if they were building the same house for
permanent loan. Once again, the customer incursspeculative sale.
the loan fees and all other fees normal to anyRealtors who work directly with builders are also
mortgage loan. The negative aspects of this typefinding the benefits of one-close financing: Instead
of construction-permanent financing are obvious:of just selling the land, and earning commission on
two closings double the closing costs, and interestthe land portion, realtors can be instrumental in
rates may change during the course oflinking up the customer and the builder, selling the
construction.land and construction package and earning
The mortgage lenders providing the best financingcommission on the entire value.
for building offer one-close construction loans.The best advice for anyone deciding to finance
These loans also allow the builder to makethe construction of a new home is to seek
construction loan draws during construction, thenexpertise in mortgage financing for their particular
automatically convert to the permanent loan onneed. Companies advertising "we do everything"
completion of construction. Besides the obviousmay not have the necessary lending relationships,
cost savings of only one closing, the otherjust as banks offering two-step construction to
primary benefit involves the interest rate on thepermanent may not be competitive. In all cases,
long term loan: in many cases, the lender will lockthe customer will find that one-close construction
in the rate at the time of the first closing. Thisloans save dollars and make sense.