STEP by STEP THROUGH the CONSTRUCTION PHASE

The Two Parts

There are two parts to a One Time Close (OTC) Loan - the construction phase - 6 - 9 months to build the house - and the associated Construction Rate. The second part is the permanent loan phase- the regular laon - know as as the "permanent" mortgage, and it's rate that you switch or 'modify' to as they call it, when the house is completed (no additional chargees to 'modify' it).

Part One: The Construction Phase

During the construction phase, for this example, we’ll go with a rate Prime + 1.  Let’s assume prime rate in the Wall Street Journal is 8.25%. Let’s assume the Construction Rate is 9.25% (Prime +1 %). It's an Interest Only loan payment for the money that the lender expends...the same amount as the Builder’s Draw….each month during the construction phase.  

A Sample Draw Schedule 

 Let's say we all sit down at the closing table November15th,  and the lender gives $146,000 for the land and $20,000  for some costs – plans, survey, closing costs. So that’s $166,000. So your payment for December 15th  is $166,000 x   9.25 % divided 12 =  $ 1,279.83 for that month. Then, let's say the lender gives the builder another $30,000 in another 30 days. Now there is     $ 196,000 outstanding on the construction loan. The payment for the following month is $196,000 x 9.25% divided 12 =   $1,510.83.  And so on as money is expended on construction.  The following table is an example of how this would look with projected draws:  

 The short version is, for the lower construction rate programs, you can pay an additional fee (a “buy down” , so to speak)  as part of your loan costs , up to $3,000 for that lesser rate. By projecting the construction draws over time, it can be determined whether it pays to buy down this construction rate.   There are also other Construction rates, that are Interest Only, that tie in with your permanent mortgage rate.   Some of the beauty of this type of plan (OTC or One Time Close Plan) that there is no money going in or low money going in to the project,  provided we get a “good” appraisal’ 

 Part Two: The Permanent Phase

You also have a lot of flexibility and time to choose your permanent loan type. You can also lock a permanent interest rate or not lock a rate- at any time, depending on the market. You can also “Cap” your permanent mortgage rate, which many times is the most practical approach.   Also regarding your permanent loan – the loan you switch over to at modification - there are a variety of choices including 30 year fixed, 20 year fixed, 3/1 ARM, 5/1 ARM etc..all the “normal”  loan types. Many times the existing home will be sold before the newly constructed home is finished. That money can be used to pay down the construction loan.  In other words, at the time of conversion to a permanent mortgage, (construction has ended), money received from your current house sale is used to reduce the amount of money outstanding and hence a lower starting permanent mortgage loan.