What Our Michigan Bank Wants You to Know About Construction Loans
A July report from realtor.com shows a 25 percent decrease in the Detroit area housing inventory compared to last year, steeper than the Midwest’s 21 percent drop. The availability of homes for purchase was already tight before the pandemic, especially for first-time buyers. Although the report cites that some sellers are more comfortable listing their homes, many remain cautious with concerns about COVID-19 and economic uncertainties.
If you’re ready to become a homeowner or want to upsize or downsize, it may be the right time to consider a custom-built house.
Why Build Rather than Buy Your New Home
Building a new house offers several advantages to home buyers:
- Designed for You. Homebuilders in Michigan (and across the US) offer hundreds of floor plans that they will customize to meet your needs, or you may want to partner with an architect to create a unique design.
- Sustainable, Safe Building Materials. Building codes for new construction require material to guarantee a healthy and safe living space for you and your family. Fixtures like toilets, faucets, and lighting focus on sustainability, so you have a home that's also better for the environment.
- Energy Efficiency, Lower Maintenance Costs. With insulated windows, energy-efficient appliances, and high-efficiency heating and cooling, your custom-built home provides comfort to your family (and your wallet).
After you contract with a licensed builder, it’s time to secure a construction loan from a financial institution, such as Level One Bank, to finance building costs. Level One Bank has locations in Ann Arbor, Detroit, Grand Rapids, and all throughout Southeast Michigan that can help.
How Construction Loans Work
Construction loans differ from personal loans or traditional mortgages in the following ways:
- Construction-to-Permanent Financing – Construction loans include financing for your build project with a short-term loan initially (usually 12 -18 months). Once the home is complete, most banks will convert your construction loan to a traditional mortgage without having to go through another closing process. This means you will only have to pay for one set of closing costs.
- Construction Draws – Banks will disburse funds from your construction loan in the form of “draws” as progress is made on your home. These draws are funds used to pay your Builder and their subcontractors and suppliers.
- The Interest Rate on your construction loan is typically comparable to traditional mortgage rates.
- Interest-Only Payments during construction are due monthly. They are calculated on the outstanding balance of your construction loan. As more funds are used, your payment will increase.
- Detailed Plans Upfront – To ensure your build plan is reasonable, banks will ask for project plans and specifications along with a contract between you and your Builder.
- Down Payment – Some banks will ask for a down payment equal to 10-25 percent of your construction loan to offset the risk of financing a home-build. Check with your bank to find out more about their lending terms.
If you don’t already own the land where you’ll build your new house, be sure to include the purchase cost in your acquisition costs and discuss this with your loan officer.
Michigan Banks have teams to support your financing needs as your new home is built and after you move in. At Level One Bank, we have a competitive Construction Loan Program with expert loan officers to help you through the process. Contact us to learn more!
“Building your own home is about fantasy, desire. But it’s achievable; anyone can do it.”
Kevin McCloud, TV property guru