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Interest Payments


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By Jason in Phoenix, AZ on 7/19/2007


I am back on the search for owner-builder financing after over a year of land ownership and almost a year of credit repair. I have learned even more about the mortgage industry, like a loan at or below $417K is considered a "conforming" loan, above that is labeled a "jumbo". Since my current total build and land costs are at $423K now, getting below this threshold is feasible, but not when I add in a contingency and interest reserve. I think I can meet the contingency requirements, but I have no idea how to calculate interest payments during construction if I decide not to include interest payments in the loan.

So my question is this: Have any of you paid the interest during construction and how much was it? I am expecting that a lot of the invoices will come after the loan has converted to a permanent mortgage and won't have to worry about that, but by the end of the build, I will probably be carrying up to $300K. Also, from the lending representatives I've spoken to, I understand you only pay interest on what's been disbursed, so it will start out small and ramp up as more funds are paid out. Is this true?

Thanks again to any info that can help me make a decision.

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By Tiffany in Conway, AR on 10/16/2007


I'm not sure why you think that most of your invoices will come AFTER your loan has been converted to a permanent? Most contractors want to be paid immediately when they finish the work. None that I have worked with except ONE (HVAC) were willing to wait more than a week... let alone 30 days or more. 

Also, your interest payments should be structured according to what you have drawn. Mine are now close to $2,000/month, as I've drawn about $225,000. Remember, too, that interest rates for construction loans, which are typically short term (9-12 months) are higher than conventional mortgage rates.


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By Kenneth in Lees Summit, MO on 10/16/2007


A couple of things, and I think Tiffany hit on them as well. I found you cannot convert your loan to permanent before the invoices come in. I had a single closing on a construction to permanent loan, but my lender was only interested in servicing the construction loan and once it converted sold it immediately. They were very stringent on having all invoices, all invoices paid, and lien releases from all suppliers and subcontractors before converting to permanent loan, either for their protection or to make the loan marketable on the resale market for these things. Please note that I had one threat of a mechanic's lien, and I was certain to close prior to that being filed (and several years later, it has never been filed).

Most of the time, I simply paid the interest out of my pocket. My interest was calculated based on what was disbursed, so at the very beginning of the project this monthly payment was very small. At the end of the project when most of your money is disbursed, your monthly payment will almost equal your house payment (not accounting for taxes and insurance, which I am not required to escrow if I can demonstrate capability to pay them directly). Granted you are paying interest only and no principal costs, but at the early end of a 30-year note you are paying mostly interest anyway with very little principal. Again this doesn't include the escrow payment that most people make that covers taxes and insurance. Also note that the construction loan will be at a higher interest rate than your permanent loan, so it is possible that your permanent payment may be less than your monthly interest charges on your construction loan at the end of your build job.

To estimate interest costs easily (and probably close enough, but that is for you to decide how much work you want to do on the estimate), I would use my interest rate, and also use a standard monthly disbursement (which in your case would be $423K/12 months, or roughly $35K/month). Your first interest payment (after one month) would be about $235, your last monthly interest payment would be about $3K, so your total interest charge over a 12-month build would be about $17K +/-. Note that this didn't take me very much time, but probably puts you in the ballpark. Be sure to verify the numbers for yourself, and if you have questions ask your banker.


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By Jason in Phoenix, AZ on 10/16/2007


Thanks both for the reply. I have also learned through friends just finishing up the construction process that invoices RARELY come later than 30 days past completion of work. I did get some quotes from a couple of lenders with the construction loan rate at 7%, which I thought was pretty good. I can definitely swing the interest payments during construction, but now a lot of the lenders have made their lending requirements much harder to qualify for and some have even stopped lending to owner-builders (Countrywide).

On top of it all, I’m in the process of removing the final issue on my credit report… a two-year-old medical bill that was incorrectly billed to my insurance and now assigned to a collections agency for repayment. The real kicker is that we have all the paperwork from the insurance stating they will pay the claim as soon as it is resubmitted with the correct info from the hospital. The insurance rejected it because the hospital recorded an incorrect address for us, and when the insurance received it they could not process it due to the mismatch. Instead of contacting us for the new info, the hospital’s billing department sat on it until a few months ago when they turned it over to the a collections agency!!!

So now I’m being held hostage by a medical bill that isn’t even mine (my wife) and although I meet all lending requirements, no underwriter will process my loan with that on my credit report… I’ve tried, even providing all the explanatory documentation, but they’re so afraid of people defaulting right now, they are very reluctant. So now I’m waiting on a lawyer to sideline the collection agency and force the hospital to re-bill the insurance, then force the insurance co. to reprocess a preapproved claim on a bill that has since passed their appeal deadline. Talk about slipping through the cracks!

My only other options are hard-money loans… and when I heard the rate, 12%, I almost laughed into the phone. Any other ideas for someone who is tired of waiting???

BTW to see what I’m working so hard to accomplish look here:

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By Guy in San Luis Obispo, CA on 10/17/2007


Jon, I really commend you on your design and SketchUp videos! I am trying to owner-build something similarly modern (Case Study) in Hawaii. I need to draft it in SketchUp and AutoCAD as soon as my wife/designer finalizes the floor plan. Have you got a breakdown of costs of construction yet? By the way, I entered the mortgage industry this year only to see it sink like the Titanic. You should try going to scotsmanguide.com to get a list of available lenders and fees. Let me know if I can help you in any way. I have a DVD that explains credit repair; I can get to you. Maybe we can trade your Architecture/Construction Admin. knowledge for my mortgage insights. 

Unfortunately, you and I and the entire O-B community have hit the start of the most challenging economic period of our lives. I am reminded of meeting an older gentleman in Jamestown, CA that showed me the house he built for himself from adobe and the actual wheelbarrow he used to drag the mud from his backyard. That was during the Great Depression and he had nothing else to do. He survived and so can we if we help each other with whatever insights we have. PM me. Aloha.

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