From construction loan
to regular mortgage
We have a construction loan that we want
to convert to a permanent loan, but the rates offered by the lender are higher
than what we want to pay. We closed on the loan at the beginning of construction.
The lender charges a modification fee of $350 to change the loan to permanent
mortgage financing. -- Melissa Mortgages
You have what's known as a construction-to-permanent loan.
The advantage of this type of loan is that there's only one loan application and
one loan closing. The idea is that the lender finances the construction of your
home, and when it's ready for occupancy, the loan is converted from a construction
loan to a mortgage.
You pay a price for that convenience. You
are a captive customer and don't have a lot of negotiating leeway when presented
with the interest rate on the permanent financing. Decisions about the loan term
and fixed vs. adjustable mortgages are made when you close on the loan prior to
construction. You're also assuming a financial risk that the house is well-built.
one-closing loan will typically be priced with interest rate locks that limit
the interest rate on the permanent loan. Alternately, the loan can have a float-down
option that will let the borrower take advantage of declining interest rates.
A float-down option can have an interest rate floor that limits how low the interest
rate can go.
If you can get a better rate by finding a new
lender, then refinancing can make sense. Whether or not you convert to permanent
financing before refinancing depends on how long a window you have before the
construction loan has to be converted.
If you can avoid paying
the $350 conversion fee, you can use the money toward closing costs on the refinancing.
Use Bankrate to shop
for the best rates in your market.
Review your loan
and any rate lock agreements to make sure there aren't any prepayment charges,
minimum loan term commitments or other charges or penalties. If there are, then
the decision to refinance becomes more complicated, and you should hire a real-estate
professional to help you evaluate the decision.
it's clear sailing on a refinancing, then use Bankrate's
refinancing calculator along with an estimate of the closing costs on the
new loan to determine how many months it will take for the monthly
savings to pay for the closing costs. (This is also known as the payback period.)
If you only plan on being in the house for a few years,
you shouldn't be willing to refinance with a loan that has a long payback period.