Thinking about building a house? Here are my recommendations on how best to get started.
Look at your finances!
The first step is to look at your finances. Do you have enough money for a down payment on a new construction loan? Most new construction loans (at least in Ohio) require a 10-11% minimum for a new construction loan.
This could come from 3 places:
Savings: You have 10-11% of the cost of the total build saved in your savings account ready to be put down as a down payment on the new construction loan. The hardest option by far.
By selling your current home. You have to sell the home you are living in currently so you can apply the equity from your home to use as your down payment. Equity is the profit you will make on the home after you have paid off what you owe to your mortgage lender. For example, if your house is sold for $225,000 and you still owe $150,000, you will make a profit of approximately $75,000 that could be used towards the down payment on a new construction loan. This is only possible if you can find somewhere that will let you rent month to month, or have a family member you could live with until your home is complete. This is the best choice financially but also the hardest on your family emotionally because this means moving twice.
Home equity line of credit. This is when you take out a line of credit based on the equity you currently have in your home. This is a nice option because you only pay interest on the amount you borrow. Most banks who do HELOC will let you borrow up to 85% of the value of your home minus what you owe. An appraiser will come to your current home and tell the bank what it is worth currently. The bank then calculates your equity based on how much you still owe. Building off the example from the last bullet point, If you have a home worth $225,000; 85% of $225,000 is about $191,000. You still owe $150,000 so subtract $150,000 from $191,000 and you can recieve a HELOC for around $41,000. You can then use that as your down payment on your new construction loan, continue to live in your current house, and only pay the interest on what you borrow which is a few hundred dollars each month. Keep in mind, you will have to pay this back once you sell the house because that is how a home equity line of credit works. Say you sell the house for $225,000. You must pay your mortgage lender the $150,000 you still owed on the home but then you must also pay the $41,000 you will owe on your home equity line of credit. You should still make a profit after paying off both loans. It only takes about 1 month to open a line of credit and it is available immediately. This is a nice option if you own a home, have equity and don't want to move twice.
Once you have looked at your finances, you should have a better understanding of if the time is right to move forward with building or if you should wait and continue to save money. This doesn't mean you can't explore builders while you are considering selling your current home or applying to open a HELOC. Which brings me to step number 2: Find the right builder and land. To be continued in my next post.
Thanks for reading!
Amanda
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