By the looks of the 401k thread, there is some financial knowledge floating around here...

I have a couple lots and want to build a house, one lot is vacant, the other has a dumpy old manufactured home on it, anything specific to look for or watch out for ?

You building for yourself or for profit? I ask this because the answers will be different.

I am going to build this house to live in, and probably hand it down when I die...

These lots are located in a rural area on the central Oregon coast, and I would prefer to get rid of the modular and just use the two lots like one big lot (~2.5 acres), maybe put in a few RV sites for guests.

The one product I have looked at starts out at 5.75 %, pays monthly as billed and is interest payments only for 9-12 months during construction, BUT they want 2% fee and they only go up to 50% value ! I'm wondering if the two step thing with a seperate loan for construction, then a mortage when finished makes more sense ?

There is more risk involved in a construction loan than purchasing a completed home. The primary issues are "will the home ever be completed, and will it have the value the appraiser said it would a year before once completed". In a flat or rising market, the home value should be good. In a period of uncertainty, who knows? This is why the pricing is higher on a construction loan than an existing home.

Most loans are priced where you can pay fees to buy down the rate, or go with a no/low fee option. The choice to pay the fee or not depends on your holding period. From what you describe, bite the bullet and pay the fee. You will make up for the fee in a few years, usually 3-4 years, due to lower interest expense. (You need to figure the fee as the cost of interest).

For example our rates on Friday were 5.875% with a 1.125% fee and 5.625% with a 2% fee. Similar to what you discussed, but this was based on 80% loan to value (LTV) and a 9 month construction period.

Assuming a $200K loan total interest costs over 4 years for the low fee option were $2,250 for the loan fee and $45,783 in monthly interest expense, or $48,033 total.

For the low rate option the fee would be $4,000, monthly interest of $43,782, and total interest cost of $47,782.

This assumes that you pay the loan fees for both loans out of pocket. All other closing costs like title and appraisal would be the same. It only took 4 years to make up the $1,750 in excess fees, plus an additional $251 in savings. The longer you hold the loan, the more you save.

You will pay the fee, one way or another. The choice is yours, depending on how long you plan to hold the property.

As far as the low loan to value, check around with other REPUTABLE lenders. 80% should be pretty easy to find out there as long as your credit is good.

Approvals for construction loans are also set to a higher standard because of the uncertainty of commodity costs. Copper and lumber prices fluctuate, plus very few "build for" or custom homes are built without change orders. Change orders add up, and you will need to have additional cash available to cover these if your loan was approved at the maximum LTV.

As far as the modular structure is concerned, give it away or sell it dirt cheap. Put it on Craigs List and some mobile home park owner or slum lord will come and get it. Many lenders will not begin construction on a property that contains a mfg home. Plus, you don't want a dumpy home there to bring down the value of your property.

On the subject of a two loan process, you can do it, but it will cost you more. You will pay twice on the appraisal and title fees, plus the loan fee. There are advantages to this, but also risks.

The advantage is if you get a construction only loan, do it with a Community Bank that holds its own paper. If you need to extend the construction period, make changes to the amount, etc, dealing with someone in your community is much easier. The chances of changing a conventional construction/perm loan that will be sold on the open market are slim, meaning that most likely that you'll have to start all over again, or it will be costly.

One of the risks is that rates may increase higher than what the 9 month lock would have been in an all-in-one construction/perm loan.

Not looking for loans folks, just answering a few questions. Your mileage may vary.

You probably will want to build on the lot with the modular, that way you might be able to use the same septic and water hookup and avoid any potential impact fees (big issue around here but may not be down there). I am pretty conservative and feel you never know what may happen it the future. For that reason I would try to keep the lots separate and get a loan on only the one with the house that is going to be built on. This means if something happens you could always try to sell the lot off and keep the house, or vice versa. It will cost you a little more in taxes, but try to keep the lots with separate tax id's. Otherwise the state may combine them as one lot and then refuse to let you separate them later on. By doing this, the owner can lose 75% or more of their value on the additional lot. The counties can and will change policies at their own discretion, often with no notice but only by changing their interpetation of the law. You may not care, but your children may. We have been paying up to $3,500.00 or more to remove old mobiles, so if you can get rid of it free do it. If the lots are big enough, there are times it can be smart to leave the old mobile on and change its status to storage. This can create a buffer between you and sensative areas and allow you to build closer to them then if you remove the mobile first and try to build later. If you run into problems getting your permit, try to hire a consultant before just doing what the town or county officals recommend. They are often wrong and don't always know their own code. Hopefully your small town is receptive and it is easy. Small town politics can make building the easiest thing or hardest thing around. Good Luck.

what dogfish said...cheers

In this case, niether the existing septic nor water system will pass muster, so those reasons for building on the developed lot do not apply...
The lots are already legal lots of record, and I would never combine them on paper, but would like to hold on to the "extra" lot forever even if I don't build on it.
I don't know a heck of a lot about money, but the nice lady at the bank told me my credit score is 770, she seemed pleased so I guess that won't hold me back. I have my own business which is good for just about everything accept showing income to Uncle Sugar so the limiting factor for me seems to be ending up with an acceptable debt/income ratio... The FUNNY thing is, since my income would be a little low for the amount I want to borrow, the bank wants to charge me a little higher rate to cover the additional risk.................yep, in other words, to help me out, they'll raise the debt side of my debt/income ratio ! At any rate I was happy to hear that all of the bumps in the road are passable, now I feel more confident about getting picky looking for the best deal...

I appreciate all the replies, and I never thought ony of you guys were trying to make a sale .

You can't have it both ways on your tax returns. If you are agressive on your tax return to save taxes, you'll end up paying for it some other way.

Best of luck on your project!

Good answers in this thread. As a consultant I agree with Krijack, you should make certain that you keep your building site options as open as you possibly can, before you start applying for permits. Don't do something that could possibly move a buffer, or setback without ensuring you absolutely do not need that space.

Andy, we need to go fishing again some time, I have a bunch of questions for you regarding this kind of stuff, both for business and some general advice type of things for this next house I am renovating.

Fuc% home construction. I've done it all my life and I'm sick of it. Stretching a dollar because I'm good in the trades has become a personal curse. And fuc% the loans and mortgages, too. I'm dropping $200,000 cash on a modest place, paid for in full and spending the rest of my life in the mountains, woods and on the river.

If you can pay cash for it, that is great.

30 year fixed at 5.00% with 1.375% fee and 5.50% with no fee as of a few minutes ago. That's a 0.25% drop from a week ago.

15 year fixed at 5% with no fee and 4.50% with a fee of 1.375%.

If we have it, other lenders will surely have very similar rates.

Those of you in the 6% range who plan to hold onto your homes might want to get your information together.

If there are folks on a 30 year at 6.5% you could drop your rate 2%, increase your payment by $265, and save almost $180,000 in interest by switching from a 30 to a 15 year note. Refinancing to a 30 year note at 5% saves you about $70,000 if you plan on dying in the house.

Dogfish,

Are these applicable to construction/mortgage loans as well as mortgage on existing houses? I ask because I'm getting ready to build. Hope to break ground by April.

Sg

Construction loans are about 0.5% higher because of the construction risk. Loans over $417,000 will be charged a higher rate.

One thing for sure is you will lhave a lot of work to do, if you try this, not knockin it, built my own place over 3400 sq ft, with a 160,000 loan about 4 years back. I owned the land. Worked with Washington Federal Savings, they specialize in this area. Lots of inspections. If you sweat a lot of small stuff all the time, dont do this. There are headaches for sure, but the end result is very satisfying. I could walk away now with a heathly profit, but i like living on acreage and the woods.

Jumbos are in the 6.5% range, so they are higher.

A VERY cool aspect of this Fed bailout bill is a huge increase in conforming and FHA loan limits. This IS going to happen and happen soon, there will be a one year temporary increase on conforming loan limits as they are set to move from 417k to over 700k! That will be a huge boost to many borrowers in the King and Snohomish County areas along with other pockets throughout the state. The best part is FHA is going to increase their loan limits to the 700k range PERMANENTLY from what our bank said today. That is huge for people with low down payments, not perfect credit or dont have massive assets etc...

Market Update: the most volatile 24 hour period I can remember in the past 10 years. Today we got back our losses from yesterday and then some but the hammering from late Wed afternoon will take a few more days like today to get back...rates are still awesome and should stay this way for awhile. Cheers

Yeah, I saw that loan amount increase info today. Looks good.

A very exciting time to be investing in real estate! If you don't think so and want out, we should talk.