Many banks give you two options for the loan(s) you choose:

One Time Close Benefits

• Rate Lock
  • Usually the construction and permanent rates are locked in at closing before the home is built.
    • In a rising rate environment, it is nice to know your rate won't go up (unless you chose a variable rate mortgage like a 5/1 ARM)
• Loan Fees One Time
  • The overall loan fees are typically lower for a one time close
• Less Paperwork and Hassle

Two Time Close Benefits

• Construction Rate Can Be Lower
  • Sometimes the rate during construction can be lower with a construction only loan
• In a steady or declining rate environment, the rate you get on the permanent financing is typically lower than the one-time close options

Ziberty Recommendation

Ziberty recommends a one-time close option in most cases.  Typically the one-time rates are a little higher than the permanent financing rates.  However, you cannot get the permanent financing rates prior to the home being complete.  What really matters are the permanent rates compared to your one-time close rate when the home is finished.  If the permanent rates are better, you can always refinance when the home is finished.  Even if you chose a two-time close, you are essentially refinancing anyway with the second closing at the time the home is finished.  Basically we think the one-time close has all the benefits, i.e. lock in a rate and there is no penalty to refinance to a lower rate (if available) when the home is finished, with limited negatives.

What's Very Similar?

• Financial and Credit Requirements
• Approval Process
• Permanent financing options, rates, and fees

What is Different?

• Interest charges
  • Typically the bank releases funds to the builder in stages as the home is being built, and you only pay interest on what you have borrowed to date
  • Loan during construction is typically interest only
• Most customer's loans are above the FHA limits for construction financing
• Two primary options for construction loan (vs. always a one time close for loans on existing homes)
  • One time close
    • This means that you go through ONE loan approval and closing process to approval both the construction and permanent loan.  In some cases the loan is the same loan.
  • Two time close
    • This means you close on the construction loan before construction, and then have an additional closing prior to starting the mortgage on the finished house
• Many banks, especially many of the larger banks, don't do construction financing
• Occasional differences
  • Some banks won't have down payment options for construction financing that are less than 20%
  • The bank may require more cash reserves in your accounts to allow for budget overruns during construction
  • Some banks don't have all the products available for construction as they do for loans on existing homes.  For example, so banks don't have VA construction loans

Most constructoin loans are interst only during construction.  Are the banks just trying to get more money out of you?  Not really, the banks found that customers wanted ways to reduce their debt payments during construction.  That is because most people are paying an additional mortgage or rent for their existing home while the new home is being constructed.  Two home payments is a lot to cover for 6-12 months.  The interest only payment will be significantly lower than a principal and interest payment.  For example, at the point of construction where you have borrwed $800k between the land and construction, your interest only payment will be $1,110 less than a principal and interest payment.  That can make a big diffferent while you are making two house payments.