You Don't Have to Refinance Your Construction Loan with the Same Lender.
The construction loan officer may also be the loan officer who handles your permanent mortgage. Or sometimes she isn't. Sometimes a bank will issue construction funds, then, when the home is completed, send the loan over to the bank's mortgage division to handle the permanent financing. Either way, you're still with the same company. But many consumers think they're locked in with that bank when they're not.
The loan officers who receive the loan from the construction department can simply make you think that it's a given that you'll use that bank for your permanent mortgage. The loan officer is certainly not going to say, "So, do you want to use me for your permanent financing, or do you want to shop around some more?" Hardly.
But you can do exactly that. As you approach the end of your construction period and your house is almost finished, it's time to start shopping around for your permanent financing and refinance that old construction note.
Commitment Fees Are Not Uncommon with Construction Loans.
These fees are typically 1 percent of the loan amount. If you sign loan papers and are asked to pay a i percent origination fee, it's really a commitment fee. That fee is nonrefundable.
Some loan officers charge a 1 percent fee up front simply to keep you from shopping other lenders while your home is being built. Other loan officers will take 1 percent from you at your initial closing, then "refund" that 1 percent origination fee when you close on your permanent loan.
This is usually nothing more than holding some of your money as an insurance policy should you decide to change lenders at the very end. If you paid a $3,000 commitment fee that is refundable, but you change lenders at the end of construction, then you've lost that $3,000 commitment fee. Your loan officer splits that money with his company.
Your Construction Loan Lender May Require a Contingency Fund.
Most often, this is 10 percent of your construction loan. It is there to cushion the blow should change orders occur during construction. If you have a $300,000 construction quote, your contingency fund would be $30,000.
If your contingency fund isn't used, you don't pay any interest on it, but it's there just in case. If you don't want a contingency fund, ask your loan officer if it's a requirement of the loan or simply a suggestion.
Another loan increase might be in the form of an "interest reserve," which is an amount that the bank loans you so that you can make your rental or house payments while your home is being built. You can take the reserve and add it to your construction loan or make the payments on your own as they arise.
Either way, you need to know if a contingency or interest reserve fund that you didn't request is being added to your loan amount. Neither of these funds is necessarily a bad thing by any means, but using one should be a conscious choice on your part one way or the other.