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You need construction-to-permanent financing

Dear Dr. Don,
I am buying land and only owe eight years on it. I want to start building my house on it. Can I do this and not refinance my property? I want to get a loan only to build the house.
-- Maricruz Mortgage

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Dear Maricruz,
A construction loan will get the house built, but unless you're paying that loan off in cash, when it's built you'll need to replace the construction loan with permanent financing. Mortgage loans are secured loans, meaning if you don't make the payments the lender can foreclose on the property and sell it.

Nobody is going to take possession of the house and move it, so the lender needs to secure the use of the land that the house is on, as well as the house itself. I might hear from a real estate attorney how you can finesse this issue, with some combination of a land lease and a trust arrangement, but without that level of complexity and expense it just isn't going to work.

I don't know your motivation in not wanting to refinance the property, but it's not realistic, given the information you've presented. A construction-to-permanent financing would be able to refinance the land, build the house and convert to permanent financing with one loan closing. Things can get a little tricky in locking in the mortgage rate at closing if your construction period is expected to last more than six months, but your lender can explain your options.

Bankrate.com's corrections policy -- Posted: Nov. 22, 2005
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