|Financing Your New Log Home – continued
Money from your construction loan is not simply credited to your account, as is the case with other loans. Construction loan funds are released in the form of construction draws keyed to the amount of construction work actually completed. In most cases, the money is paid out by the bank in exchange for proof that labor and materials were used to build the home.
Progress is verified by on-site inspections conducted at pre-determined intervals during the construction process by an agent of the bank. Each financial institution will have its own rules, but generally, some percentage of the loan will be released as specific points in the building process are reached. For example, once your foundation has been finished and inspected by the bank’s agent, the bank will release roughly 25 percent of the loan into your account. This amount should be enough for you to pay for the work up to that point and get started on the next step.
Typically, there can be four to six construction draws during the complete building cycle:
- First Draw on completion of the home’s foundation.
- Second Draw on completion of a weathertight house shell.
- Third Draw on installation of electrical, plumbing and HVAC systems.
- Fourth Draw on completion of interior finish and trim and installation of appliances and bathroom fixtures.
- Fifth Draw on completion of house, building and loan inspections.
- Sixth Draw 60 to 90 days after completion or after sufficient time for the filing of mechanics’ liens.
Your advantage in this process is that you don’t pay interest until the money is dispersed by the bank, then you only pay interest on the amount drawn. If the construction loan is $100,000, for one year at 10 percent, the interest won’t end up being $10,000, as might appear to be the case. The interest should only be a small fraction of that amount, since the full $100,000 will not be drawn until the last of the work has been done, usually close to the end of the term.
The construction of a log home presents a slightly different situation to the bank providing the construction financing because you will be purchasing a large percentage of your material, often $25,000 or more, in one package from the log home producer.
Log home producers often require a substantial portion of the cost of the package in advance of cutting and delivery. You should avoid making a large down payment on the logs until you have secured financing for the entire home but, once you have your financing, there are several ways to proceed.
Some lenders view a log package as just another load of lumber, or as work under way at the producer’s plant, and release funds to pay for it when you and the manufacturer request. In other cases, the bank may refuse to release any money until the package is actually present on your lot. In these circumstances, the bank should issue a promissory note–sometimes called a letter of credit, an assignment form or a voucher check–to the log home producer guaranteeing that payment will be made on delivery. Often the bank can wire transfer the money directly into the log home producer’s account the same day that the logs are delivered. Your builder-dealer should be able to help you arrange with the bank and the log home producer for the most convenient financing of the log package