Construction Loan or HELOC?

[Grizzly]

Having a house built and trying to decide between a home Construction Loan or a HELOC. I need a loan that I can draw money as needed for a year to 14 months.

Construction loan puts the bank as a middleman between you and the builder and does checks on what was done before paying the builder.
Closing costs and a higher interest rate add to the cost of getting money for the build with a construction loan since it is short term.

I own my current house so getting the full amount with a HELOC should not be an issue. I have money in two major banks and neither are doing HELOCs right now so I would need to find a bank doing HELOCs. I can do the house checks myself on the construction progress but I do like that a construction loan does give you a person in the middle to help in case of issues.

Not sure what route to take.

[IMhooked]

My wife is in new construction sales. She's had people take out a HELOC on their existing real estate to purchase land for a new project or complete driveway and landscaping, but not complete a whole project.

One of the reasons stated was that when applying for a HELOC you are required to disclose the purpose for the the funds. Banks that issue may have certain requirements that are more strict. Even construction loan underwriting has gotten more stringent in this low rate/higher cost of materials environment!

The construction loan route is seen as a more typical approach. The checks and balances the bank provides, that you mentioned, during the build process that triggers the release of funds is a layer of protection outside of your typical build insurance. When it comes to building mitigating and reducing risk is important, arguably just as-if not more-important that any savings you might obtain from reducing closing costs or interest rate basis points.

Sometimes when optimizing for saving money on an overall project, you may have to ultimately give way to higher risk on a project. If you reframe your thinking to looking at closing costs and the higher relative interest rate at the cost of reducing risk on the project, it may help you sleep better.

If you're looking for an efficient timeline on the build, finalizing your selections and committing to your build vision before your project initiates will ultimately save you time and money. The biggest "drag" on your project and ultimately money will be changing your mind on certain aspects of the home after the project has gotten underway. The other barrier to time and ultimately money can be 'by owner' activities, where the client is looking to complete some part of the project themselves, or they have a family friend with a plumbing, electrical, flooring, etc. company and they want to 'save' money that way. It may save, in theory, but then said friend gets busy and can only come work on the project 3 days a week after their 9-5 activities so it interrupts the overall flow of the other subs thus extending the carrying cost of the loan, etc.

What part of the country are you building in? What's your new project looking like (i.e. acreage, sq. footage, ranch or two story, etc.)

Having a wife in the industry I love hearing about people's visions on projects and then watching them go from dream to a tangible, completed project. We go for rides and look at projects underway for fun all the time! Good luck!!

[Grizzly]

Thank you for the detailed response. Looks like we'll stick with a construction loan.

[digthemup]

Grizzly,
I do not know how the bank you are going with is structuring the loan, but you can get a construction loan that gets rolled into a permanent home loan on the final draw.
I was a builder for many yrs, and even when doing a spec, I would have it structured similar to a construction loan by the bank, normally 1 of the 3 I worked with, so that my buyer could roll it at closing.
It is nice that you are keeping track of your build, but the bank inspector is all up on the local building codes with all the current changes, and at the end of the day, your builder will need to adhere to what the inspector says so he can get his draw. Most inspectors I worked with were very reasonable, especially since many had been in the trade, so you are getting a ++.

BTW, a lesson learned in the southern states during the nasty winter freeze, make sure that any water line coming from the main is at least at 4', and have as many internal lines run up in internal walls, otherwise have them well insulated, which that will help you heat or A/C. We run everything 5' up north, and starting to use a light coating of spray insulation to seal all minor gaps even with house wrap, in addition to fiberglass batts. I do not know if you are doing basement, but I have 10" poured walls heavily rebarred #5, with insulation blanket or solid 3" boards where needed.

[NitroZ7]

I can't speak to all states but if you get a construction loan in Florida on the home you are building, the mortgage will take priority over any mechanics liens as long as a Notice of Commencement is recorded after the mortgage. This gives you a little bit more leverage if problems arises as the lender will have priority over any construction liens. Also the lender will have conditions to advancing funds and it will not put you head to head with the GC. If the Lender won't make an advance because they haven't received lien waivers etc. then it a lender requirement not you being difficult.

Make sure you know the laws of the State where you are building. I have seen people pay a GC and then the GC does not pay a subcontractor that gave a Notice to Owner and then they end up paying twice. Building a home is exciting but it can turn into a nightmare so make sure you know the mechanic lien laws wherever you are building.

[digthemup]

Nitro,
Excellent point about the Mechanic Lien Laws, and you can also have your attorney put the exclusion in the contract so you can't be held liable for any subs or unpaid materials.

[RonShow]

Very informative but I personally try to avoid taking loans

[RockOn]

I had an installment loan once in my life. It was back in 2012, from company called noeltichy. Everything went well, I returned it on time but I am definitely not the person who likes to owe something to someone.