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So you want to build your dream home…

Home BlogSo you want to build your dream home…

Key takeaways:

  • When building a home, you should consider the different options you have for financing both the construction and the home itself.
  • While many banks require two loans – one for construction and one for your home mortgage – that is not always the case.
  • If you’re hoping to buy a fixer-upper, a one-time close option can help you avoid taking separate loans for your home purchase and construction.

You can see it clearly in your mind – your dream home. Perhaps it has white cabinets and tons of outdoor space or perhaps it’s a cozy cottage with hardwood floors and a fireplace.

Whatever it is, finding your dream home isn’t always an option. That is why so many people turn to new construction or renovating a home into their dream one. In fact, at the beginning of 2019, there were 1,345,000 building permits and 1,230,000 housing starts in place, according to the U.S. Census Bureau and the U.S. Department of Housing and Urban Development.

When it comes to creating your dream home – be it constructing or renovating – you have several options to consider for financing it.

Building your home

When building a home, the loan process can quickly become overwhelming.  To help make the best financing decision, understand the options you have for financing both the construction and your home once construction is finished.

  • Builder financed: In some cases, the builder will finance construction and you can obtain a permanent mortgage once the house is complete. In this case, you are only responsible for your home purchase, so you don’t have the responsibility of financing the construction. Unfortunately, builders don’t always provide this option.
  • Consumer financed (Two loan closings): Other times, you need a construction loan for the period of construction. Then, you’ll need a final mortgage once construction is finished. This option usually requires to separate loan closings, which generally add time and costs. 
  • Consumer financed (Single closing): Lastly, a single closing loan allows the construction loan to become the final mortgage loan once construction is finished. This option is usually the most efficient because it requires less time and fees.  It’s a one-stop shop.

MidWestOne offers a single closing construction and renovation loan that helps empower you with a fast and more efficient loan process. This one-time or single close construction program makes construction financing easy. Plus, you’re able to convert to the loan product that best fits your needs. 

Renovating your new home

If you’re not building a home, but considering purchasing a fixer-upper, you can run into a similar problem of needing to finance two things – the home itself and the costs of renovations. Similar to the new construction process, there are numerous options to consider.

  • HELOC: One option is to purchase your home with a traditional first mortgage and then use a Home Equity Line of Credit (HELOC) which operates in a similar way to a credit card, with the bank establishing a credit limit based on your income and credit score. However, your credit limit is also based on how much equity you have in your home, so it's important to consider the scope of your renovation and how much money is needed. Since your home secures the line of credit, the limit is typically set by subtracting the balance you owe on your mortgage by a percentage of the appraised value of the home. This is not a good option for most new homeowners who haven't had time to built equity in their home.
  • Two loans: Some banks also offer two separate loans – the first one for the mortgage and second one for the renovation. However, this is usually a lengthy process. After buying your home, you can apply for a separate loan outlining the renovations you want to make. The bank will then appraise the potential value those renovations will bring to the home and ask you for quotes from contractors. If the bank approves the loan , you’ll still have two separate payments and two set of closing costs.  
  • Single close loan: A single close renovation loan may be a better fit than taking two separate loans or using a HELOC. This is a type of mortgage with built-in, fixer-upper funding. The benefit of including this loan with the mortgage is that it covers your home purchase and renovations in one take.

When building your dream home and deciding on the financing, consider looking for efficiency. You’ll want to spend more time enjoying your new home instead of dealing with paperwork and increased fees.

If you’re interested in building your dream home or purchasing a fixer-upper, visit your local MidWestOne branch on April 18 or 19 for our Home Lending Days event, or stop in to see us at any of our locations.

MidWestOne Bank does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.