Building your dream home is an exciting journey. From choosing floor plans to picking out finishes, it’s a process full of anticipation. Because of all the new homes being built in the Triangle, building a home may be one of the easiest ways to buy a home right now. But when it comes to financing the build, many first-time builders wonder: Do you start to pay a mortgage while the house is being built?.
The short answer? Not exactly. Here’s what you should know about paying for a new build.
Building a new home is an exciting journey, but it also raises many financial questions for first-time builders. One of the most common is, “Do you pay a mortgage while the house is being built?”
The short answer is no, you typically don’t start paying a full mortgage until construction is complete and you move in. However, you do make payments during the building process. Let’s take a closer look at how financing works when building a custom home.
Construction Loans Allow Gradual Payments
Instead of taking out a traditional 30-year mortgage, most people get a construction loan when building a new house. This short-term loan covers the costs of building and is paid off when construction is finished.
With a construction loan, you only pay interest during the building phase, not the full mortgage payment. This keeps your payments low while the house is being built.
For instance, if your loan is for $300,000, you might only pay interest on the $100,000 you’ve already given to the builder. You’re not yet paying off the whole principal.
Two Options After Construction
Once your dream home is move-in ready. you have two options for paying off the construction loan
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Refinance into a permanent mortgage This is the most common choice, The construction loan is paid off and replaced with a traditional 30-year fixed-rate mortgage Now you’ll start making full principal and interest payments,
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Get a new purchase loan: With this option, you get approved for a totally new mortgage to pay off the construction loan at closing. This can allow you to shop lenders and lock in current interest rates.
In either case, you’ll need to meet the requirements for the new long-term loans. Compared to the interest-only construction loan, your payments will go up a lot.
Other Costs to Budget For
While you aren’t making full mortgage payments during the build, there are other construction loan costs to plan for:
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Higher interest rates: Construction loans typically have higher interest rates than permanent mortgages.
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Closing costs: Expect closing costs when taking out the initial construction loan and again when converting to a traditional mortgage.
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Upfront fees: Many lenders require origination fees and application fees upfront for the construction loan.
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**builder deposit:** It’s common to give a deposit to the builder directly. This serves as your earnest money.
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Upgrades: Any upgrades you choose during the build may require out-of-pocket payment rather than being rolled into the construction loan.
Tips for Managing Construction Costs
Building a home is a big financial commitment. Here are some tips for staying on track:
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Get pre-approved so you know your budget from the start.
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Communicate frequently with your builder to avoid delays that could increase interest costs.
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Consider getting a fixed interest rate on your construction loan to avoid rate hikes.
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Have a plan for selling your current home or covering both mortgage payments if needed.
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Work with a lender experienced in construction loans. They can guide you through the process.
While you aren’t making full mortgage payments during construction, it’s vital to understand the costs involved. With proper planning, you can make building your dream home a smooth and rewarding journey.
Frequently Asked Questions
When do you start paying the full mortgage?
You start making full principal and interest payments on your mortgage after construction is complete and you convert the construction loan into permanent financing. This is usually done through a refinance.
What are the monthly payments during construction?
During construction, you will make interest-only payments to the lender on the amount disbursed from the construction loan so far. These payments are lower than full mortgage payments.
What happens if construction is delayed?
Delays may mean you have to make interest-only payments longer than expected, increasing your overall costs. Stay in close contact with your builder to try to keep the project on schedule.
Should I pay off the construction loan or refinance?
Refinancing into permanent financing is usually the simplest option. But paying off the construction loan and getting a totally new mortgage could allow you to get a better interest rate.
How much do I need for a down payment on a construction loan?
Construction loans typically require 10-25% down, higher than a normal mortgage. Bringing more down payment can get you a better rate and show the lender you’re financially committed.
Building a home from the ground up is complicated, but understanding how construction loan payments work goes a long way. Partnering with an experienced lender and builder can make the process smoother. With proper planning, you’ll be making full mortgage payments on your dream home before you know it!
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If you start building a new home without selling the home you’re currently living in, you may have to juggle two financial responsibilities: your current mortgage and your construction loan payments. Factor this into your budget as you consider building.
However, if you sold your previous home and are renting while you build, the construction loan payments will replace your mortgage costs during the building process.
You don’t need a standard mortgage right away
When building a home, you typically don’t take out a traditional mortgage while the house is being built. Instead, many homeowners use a construction loan. This type of loan is a short-term option that covers the costs of materials involved in the build. Next, keep in mind that there are numerous builders across the Triangle, and that you may take different approaches depending upon the home you’d like to build.
The first example is where you, as the buyer, take out a construction loan that you draw from to cover those initial costs. You’ll pay that loan during the building process. It’s typically much smaller than a mortgage. And thanks to these disbursements, you’ll pay for the major milestones in the construction process. Those milestones include laying the foundation, framing, or installing plumbing.
A second example is where a custom builder is building in a subdivision and has a loan out on the project. A builder may require the buyer to pay the interest on the amount drawn to construct a home. For example, if it took $100,000 of a $300,000 loan to build the home, you’ll pay interest on $100,000 — not $300,000.
Finally, some builders may only require a deposit, known as a builder deposit, which acts as earnest money. This is due when you sign a contract with the builder and will be applied to the final purchase price.