Most often when buyers contract to have a home built in a subdivision where the builders are building spec homes the builder will finance the project. In these instances the cost of financing is built into the cost of the home. If building a custom-built home, you should explore the possibility of financing the construction of the home by taking out the construction loan. You may even be able to finance the construction in spec home subdivisions if you start with the selection of a lot.

There are two major reasons why you should consider carrying the financing. The first is that you will have more control over the project by having the financial control. Secondly you can save money through the financing of the construction loan.

Most builders will borrow the money to purchase the lot and pay for the materials/labor. The loan rate paid by the builder is generally going to be at least 2% greater than the rate you would pay for the loan. Assuming it will take the builder 6 months to build the home with the rate at 9% which is 2% higher than your rate and the purchase price for your home is $250,000 the builder will charge you a cost of $11,250. If you borrowed the money at 7% your savings would be $2,500. In addition you have a home loan interest that you may want to consider as a tax deduction. While it is a common practice to deduct this cost, a CPA claims that the home buyer has to occupy the home before the deduction can be claimed.

In addition to the interest rate cost, the builder will have the following loan closing costs: appraisal fee $300, discount point (1/2 % , this would amount to $1,250 on the $250,000 loan), recording fee $10, closing fee $150, and Mortgage tax $2.60 a thousand ($650 on the $250,000 loan .) Some states may not have the mortgage tax. These items total $2,360.

The above cost demonstrates that it is possible to save $4,860 on a $250,000 purchase price by financing the construction loan. When the buyer finances the construction cost, the builder should reduce the price of the home by this amount.

Typically buyers close on the purchase after the home is completed and ready for occupancy. In the case of a construction loan, the buyer closes on the loan at the time the contract is firm and the loan approved. The lot is then purchased by the buyer rather than the builder. The contract will generally specify the amount of scheduled payments that will be paid to the builder to allow the builder to start the project. In addition invoices will be submitted by the builder monthly to the loan company. As a buyer you will want to monitor these billings to make sure that payment is not being made on work that has not been completed.

The control of your money in the project is even a greater benefit than the savings. What generally happens when purchasing a home with the builder financing the project is that the builder will ask for earnest payments that are nonrefundable. These will often be as much as $5,000 to $20,000. In these situations if the builder is not performing on the contract, he has your money tied up in a contract on property which he owns. When you finance the construction, the money is going into the improvement of the property you own.

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