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Mr. Smith wants to build a new house in a southern state. He lives in the north where he owns his current home free and clear, has an excellent credit score, no debt, very stable income, but not much cash. He does not want to sell his old house first.
The new construction will cost $400K. He can pay 20% down, and get a 30 yr. fixed mortgage at 5% or better, with no pre-payment penalty. He then plans to sell his old home for $250K within six months. Within a year or sooner, he hopes to prepay in full the new construction mortgage.
Does this make sense?
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Your concept is basically sound. Finance and build a new home then sell the old home and pay off the new home loan. Your math seems a little off in that 80% of the $400K construction would leave $320K for a loan. So if he is to net $250 from the sale, he will be short for the payoff.Typically, the best construction loan is a single close program that combines both the construction phase with a permanent loan. (Single Close Construction to Permanent Loan). These are normally set up with the permanent loan being a 5 year fixed term loan. That would work fine in this situation due to his intent to pay it off before that timeframe. The fees are higher for these loans than compared to a traditonal purchase transaction. But with good reason, they are very labor intensive. But as long as these costs are considered into the total cost and it proves still favorable, go for it.There are only a few firms remaining that are offering construction to permannet loans at this time. With the cost of new construction typically higher now than pre-existing homes, the banks are cautious. There can be benefits to owning a new home though, building on your perfect lot just exactly the way you like it. Sometimes money is not the only factor to consider. Go for it.
Have you gotten a recent appraisal on your current property? What is the average length of time to sell a home in your area? There are many factors to consider. It sounds like you have thought through your new loan process- speak to a qualified lender and realtor in your area to cover all the bases.
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