The news is full of new fluctuations on the home financing scene. Locking in your mortgage rate for 30 days when you’re purchasing an existing home is difficult, and locking in a permanent mortgage rate for the 12 to 18 months it may take for you to complete construction of your home is even more complex and expensive.
So what can you do if you’ve found your site and you’re ready to get started on permits and construction? Here are five alternative financing strategies I’ve helped a number of my clients to work out to make it through the current financing turmoil at the same time as they get their home built. You can use just one or any combination of them — but be sure you use an attorney and/or a realtor to draw up the contracts and fully understand deadlines and your responsibilities in each deal.
1. Lease option the land.
If you know you’re a year to 18 months from clearing all the tests and permits and actually starting to build, lease optioning the land is the best way to hoard your cash and control that site you love at the same time.
In today’s market, sellers — particularly land sellers — are having a difficult time finding buyers. Many of them simply take their property off the market. Those who are still selling are that wonderful find for buyers: motivated.
Lease options can cost as little as 1% of the purchase price you’ve negotiated. They involve a contract that says you agree to a deadline to pay the full purchase price (or the down payment, if you’ve also negotiated a seller carryback deal — see Strategy #2) by a certain deadline, or you lose your option money. This strategy works well for the seller, too, because:
• He or she doesn’t have to pay taxes on the option money until the contract is up, when it either becomes part of the purchase price or you decide against the project and lose the option payment.
• The contract usually calls for you to turn over all the tests and permit work you do to the seller, which can then be used on a sale to another customer.
2. Seller carryback financing.
While you’re discussing the lease option, talk to the seller about seller carryback financing. If you’re able to come up with a 20-25% down payment, and you can provide the seller with bank references and a good FICO credit report, sellers should seriously consider carrying back the rest of your price at a bottom-of-the-market interest rate and a slightly top-of-the-market price because:
• It will get the seller a better price, which is taxed at capital gains rates.
• If the seller is paid off “in installments” over two or more years, he or she often saves on taxes because the installments may put him or her in a lower tax bracket.
3. Credit card financing.
Check out the cash limits and terms on your credit cards. Many are still offering ultra-cheap cash advances for a year down the road. If you are doing most or all the work yourself, the first summer or even the first two summers may be spent on infrastructure and foundation. These items take a good deal of time, and — if you’re hiring contractors — can be quite expensive, but if you and your family are doing the labor, credit card financing will be by far the cheapest way to finance this stage.
4. Take out a second mortgage or a home equity line of credit on your current home.
Once you’re to the point of the actual log-home construction, however, the cost of your materials package is often too big for most credit card accounts. The cost of a second or a home equity line on your current home is usually at a lower rate and easier to get than a construction loan on your log home.
It’s practically impossible to get a second loan from any lender except the lender holding your first mortgage, but you can still comparison shop for a home equity line of credit. Talk to a couple of other home equity lines of credit lenders on their rates and terms. And double-check with log home lenders to see what they can do for you in your situation, too.
5. Refinance your current home mortgage.
This strategy is much like strategy #4, but it’s used in different situations:
• Your existing home mortgage has a rate that’s higher or equal to current first mortgage rates.
• Your existing home mortgage is a fairly small amount, and the monthly payment of the first plus the payment on a second and/or a homeowner line of credit comes more than the monthly on a refinanced amount. Always have your lender help you do monthly payment math.
• Origination costs on a refinance are close to the same as what you’ll pay on a second or a line of credit. Again, have your lender help you do the math. Origination fees can vary enormously between lenders and between strategy #4 and strategy #5.
• You intend to sell your existing home and move into your new log home, once construction is complete. Again, when that moment comes, you’ll own your new home free and clear — talk about a win/win strategy!
Shari Steiner is a licensed real estate broker, a speaker and the co-author of Steiners Complete How-to-Talk Mortgage Talk and Steiners Complete How to Move Handbook. You can find out more or ask her questions on her www.movedoc.com website.
This article ran longer and with more detail in the January 2008 issue of Country’s Best Log Homes.