Mortgage Solutions

By Nancy Holt Burgess

In October of every year, thousands of people head out to the area’s new home subdivisions to participate in the Raleigh-Wake County Parade of Homes. It is a wonderful opportunity to check out “the latest and the greatest” that is available in home building. Whether you are actively seeking to build a new home or just dreaming of one, the Parade of Homes is the perfect way to gather information about the area’s builders and the products that are available. If you are one of the hundreds that will actually be building a new house this year, I would like to share some ideas about how to best finance your new dream home.

As important as it is to select the right builder, it is also equally important to select your best financing options in the beginning stages of construction. In the Wake County area, there are hundreds of mortgage lenders available from which to choose. Where do you start? Some builders will suggest their preferred mortgage lenders for you to use. Typically, you will be offered financing concessions should you use them. In a lot of cases, the concessions are closing costs paid on your behalf. The dollar amount will vary. If your builder offers this option, it is worth your while to investigate. If your builder does not offer financing incentives, then you are free to use any lender you choose. Always ask your sales agent’s advice about whom to work with for your financing. The agents will know who has the most aggressive products and pricing. More importantly, they will know which lenders have the better reputation for delivering what has been promised. When you contact the mortgage lender, one of the most important questions to ask is what programs are available to protect yourself should interest rates increase. 

As someone building a new home, there will be plenty on your mind and the last thing you need to worry about is whether or not you can afford the home. The key to knowing this is in the interest rate that will be charged for your mortgage. Most lenders offer extended rate lock programs that will lock an interest rate for up to 360 days. The differences between the lenders will be in the fees and the add-on to the rate depending on how long it will take to complete the house. The lender will disclose any fees that are required to guarantee the longer term lock. You should shop for a lender who will refund your lock in fee at the time of closing. Another feature to look for is known as a float down option. Once the lender has locked your rate for the extended period, you will need the ability to drop the interest rate should the current market rate be lower than where you locked. For instance, say your lender allows you to float down to the current market rate within 60 days of closing. By giving the 60 days, you will have a larger “window” to take advantage of a lower rate should it occur.

Once you have found the most aggressive extended rate lock, it’s time to determine the type of loan with which you wish to finance your new home. In a lot of cases, the builder will provide the construction loan while your home is being built. If the builder does not provide the construction financing, then you might be interested in a loan known as a construction-permanent loan. These loans provide financing during the construction phase and then convert to a permanent mortgage once the home is complete. There are numerous types of construction-permanent loans, but the easiest type will typically require only one closing. Construction-permanent loans do carry higher closing costs as well.

If your builder covers the financing of your home during the construction phase, then you simply need to concentrate on the type of mortgage you want. These days, there are hundreds of loans available with as many numerous options as a borrower could want. One of the newer trends is to consider an interest only loan. These loans do not have the traditional amortization. If you choose an interest only loan, then any principle reduction is made by paying additional amounts down. These loans are most useful for someone who might have “stretched” to build more home, but who plans on a higher income down the road. The interest only payment is a feature that can be added to most of the traditional loans. One that is most popular now is the 10/1 arm with the interest only payment. What this means is the rate is guaranteed for 10 years, with the borrower having the convenience of paying just interest accrued each month. It is based on a 30-year loan, so therefore your payment will be lower once the 10-year period is up. 

My best advice is to make an appointment with your mortgage lender and determine exactly what your needs are when it comes to the financing of your home under construction. With interest rates as low as they are now, and of course with the financial gurus indicating that rates will go up, now is the perfect time to consider building your dream home and securing your financing for it. Remember that you can hold or lock an interest rate up to 360 days without cost. Also consider an interest only loan. It allows you to upgrade your home with approximately the same payment you would have had on one of the more traditional loans.

The new home market is great right now and buyers have many top shelf builders available to them. Consider building your own dream home because the mortgage industry has you covered with all of the unknowns when it comes to financing. 

Nancy Holt Burgess is a 16-year veteran in the mortgage industry currently working for First Horizon Homes Loans. She can be reached at 431-9588 or visit <www.nhburgess.com>.