What to Keep in Mind About Finances When Building Your New Home

Even if you like the pre-built house that you've bought, there are some moments of dissatisfaction that may come up. You may end up asking yourself, "What was the builder thinking?" To avoid that frustration, a common practice these days is to finance the custom building of your house. Although you may have the freedom to determine the design and the size of the house, your finances may play a part in the type of home you ultimately end up with.

Down Payments and Mortgage

Financing for building your home is useful if you are building the house yourself or using a custom builder. Construction loans tend to be short-term to finance the project within the stipulated time. You can later convert the loan to a long-term mortgage. With construction financing, most lenders want a substantial down payment. The down payment may vary from 20-25%, but in other cases—depending on the lender—it may be lower. There are several advantages of placing a 5% down payment, but determine what's right for you. The down payment will be essential when you would want to convert the short-term construction financing to a permanent loan.

Staying on Budget

The idea of having your dream home may cloud your judgment. These expectations may lead to an unhappy ending when construction is completed. Understandably, these construction times will be stressful, but remember that all you are thinking may not solve the problems at hand. Always think long and hard about the project before deciding on what you want as your needs may change within a short time. Always stick to the initial vision and budget once you get the financing. Avoid new additions to the initial design to avoid going over the budget.

Bridge Financing

These loans are vital during the construction phase as they may assist you in getting past a time squeeze. The loan bridges the gap between you building a house and selling the current house. The lender may be your local bank or your current builder. They may agree to advance you a loan with the equity of the current home serving as collateral. Bridge loans are short-term and are associated with higher rates compared to mortgages.

In a nutshell, always equip yourself with knowledge before taking your records and documents to seek home financing. In this process, make sure you find the best financing terms for convenience in constructing your new home. Also, keep in mind that there are lots of options, but not every option is the right one for you.