Mortgage options for rebuilding your home


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Dear Dr. Don,
We are planning to rebuild our home and have an existing mortgage. We have also qualified for a construction loan. Once the work on the newly rebuilt house is completed, can we convert the construction loan and refinance immediately? Of course, we’d want to be sure that rates are favorable.

— Jay Jericho

Dear Jay,
The fact that you’re looking to rebuild your home makes it a more complicated process. Are you tearing down the existing structure, or just adding on? A tear-down is a big deal because that would require you to pay off an existing note prior to demolition.

A construction loan is, as the name implies, a loan that finances a construction project. It typically comes due when you’ve received your certificate of occupancy on the completed project.

If interest rates are rising, you might want to consider something called construction-to-permanent financing versus having two separate loans. That’s as long as the loan program gives you the ability to lock in the mortgage interest rate through the construction period. You would want to know the actual cost of this rate lock to decide whether this option is right for you. Construction-to-permanent financing also has the advantage of just one loan closing, which could save you in the long run.

You could also look into a Federal Housing Administration 203(k) loan as an alternative to a construction loan. This is a loan program providing for rehabilitation and repair of single-family properties.

According to the FHA website, “The borrower can get just one mortgage loan, at a long-term fixed (or adjustable) rate, to finance both the acquisition and the rehabilitation of the property. To provide funds for the rehabilitation, the mortgage amount is based on the projected value of the property with the work completed, taking into account the cost of the work.”

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