More and more prospective homeowners are choosing new construction or custom renovation in response to the limited supply of homes on the market. Just this past summer, private residential construction spending in the U.S. hit a seven year seasonally adjusted high of more than $380 million. Based on the supply shortage we’ve witnessed in some parts of the housing market, this isn’t a huge surprise. In fact, in EverBank’s 2015 High Net Worker report, which surveyed mass-affluent Americans, 30 percent of respondents planned to make a real estate purchase by the end of 2016.
Before breaking ground on your new home, however, it’s important to meet with a mortgage expert. You should spend just as much time – if not more – figuring out your financing as you do picking out new carpeting, faucets and lighting fixtures.
Longtime homeowners may have purchased several homes, but many are unfamiliar with financing new construction. Even if you have been through the construction process before, the home financing market has undergone significant change over the past several years and you’ll want to brush up on the many new mortgage options in the marketplace.
Whether you’re starting from scratch or making renovations to your home, the following are all points to consider.
- Avoid loan officers on "auto-pilot." It’s important to work with a mortgage expert who is willing to take the time to understand your situation holistically, not just your top-line financials. Discussing the details of your new home construction or renovation project, the timeline and any other major factors, in combination with your financial goals, is essential to the process of developing a mortgage that is best suited to your needs. Avoid loan officers who appear to offer a one-size fits all approach and don’t invest time in developing that ever important 360-degree perspective on your mortgage.
- Understand your builders approach to financing: Many large and regional builders will finance the construction phase of your new home. However, if you are building a custom home or doing a major renovation with a local builder, odds are you will be expected to provide the funding of the construction as the project progresses.
- Evaluate your options. A tailor-made financing solution begins with understanding your situation and the goals of your new construction or renovation project. If you are working with a builder who provides financing during the construction phase, your focus will be on the financing of the completed home and the options you have to protect yourself from rising interest rates during the construction process. If this is your situation you will want to consider long term rate locks or interest rate caps that cushion you from rising rates but allow you to float down to current market if rates stay steady or decline. If you will be financing the construction phase, you may want to consider a construction-to-permanent loan. This all-in-one product streamlines the construction-to-homeownership process greatly by combining the construction financing with a permanent loan. Best of all, you will go though one qualification process and one closing.
For smaller home renovations, you might consider a home equity line of credit (HELOC). This option will allow you to tap into the equity of your house to pay for the renovations as they are completed. Although many HELOC’s come with variable interest rates that change monthly, if you are concerned about rising rates or simply want the peace of mind that comes with more certain payments, look for a lender who offers the ability to lock in the interest rate for an extended period.
- Take a holistic approach. The number one mistake homeowners make is viewing their home as somehow isolated from their investment portfolio. By viewing your house as an asset and engineering your mortgage payments based on your financial priorities – whether they be financial stability and a consistent monthly fee, the ability to pursue other investment opportunities as they arise, or a long term goal of paying lower interest – you can ensure there will be no surprises with your next home mortgage.