Do a thorough search among lenders. Some will do both the construction and permanent financing, while other lenders will only do the permanent mortgage, and recommend a separate lender for the construction loan. Hopefully a search of both types of lending will produce a lending package that works for you.

I bought a house in the early 1990s, using an ARM, because I had a young family and money was tight. Soon after assuming the load, interest rates climbed to 14%-16%, if I remember correctly. Never again!

Once fooled, shame on them. Twice fooled, shame on me! A painful lesson learned.

Good luck on your project.

We are going with a fixed rate....hate gambling (hehehe).

When I remodeled/gutted my home back in 1993, I refinanced everything into a 1 year arm. It started at 3.875% and the highest it went was 8.875% . For me it worked out fine. Currently the rate has been 2.875% for the last two years. The caps are 2% and 6%.

I struggled with the same thing. I ended up going with a fixed rate for construction and it stays the same after the transistion to traditional mortgage. I did not want to gamble. Ratese have already climbed in the last 6 weeks after our close so I think we will come out ahead at this time. I always figure we can refinance too if rates drop down to the 3s again after close. The lowest rate, and we had a good downpayment and good credit, for the fixed was 5.3% with an optional buy down to 4.75. Rates at the same time for a 30year fixed were right at 4%.

Go with fixed for sure! I would only do an arm if it were during construction but changed to a fixed afterwards. (that is what mine was)

Rates are so low right now that there really is no where to go but up (for the most part). Lock in a rate while they are still low.
-Stuart

I personally would 'never' use a ARM. I knew several couples lost their homes in the last few years because of this.

Ours wasn't going to be a traditional ARM after construction. The rate would float up or down to match the market but I figured on it most likely going up so I locked now rather than later. A more typical ARM would have a period of several years at a greatly reduced rate and then up to match the market then. Mine would've been only 12 months before the float.

I am curious how anyone found a bank to provide a construction to perm that was NOT an Arm . Fannie and Freddie don't by these types of loans so most lenders only offer construction loans or Construction/Arm with a rate lock before construction starts (at least in my area ) . I would have liked a 30 yr fixed .

I went with a single close 10 year jumbo arm with 11 months of construction Interest only - with 4.75 rate. If rates are still low when the house is done in may/june - I can refi - otherwise I have 10 years to paydown some of the loan before I need to refi with a higher rate.

the bank I used was US bank , but I talked to wintrust(first merit ) and Wells fargo and they all offered similar loans

Fixed interest. Every time.

Our bank (a local bank) is financing the construction in-house, then will be a 30 year fixed once we make the transition from construction to permanent.

The good thing about Arms now is that they have caps. Like Robin said, it use to be that the payment could become so high because the interest rates were in the teens.
An Arm is not the best option if you are not planning to 1) Move before the arm starts adjusting or 2) Pay down a large portion before the arm starts adjusting.
When I refinanced, we knew we were looking for land. I went ahead with an arm that was fixed for 7 years before it adjusted. I also calculated that if the payment went to the highest it could, I would only pay 20% more per month than my amount before I refinanced.
If you have a 200K loan with 1,000 monthly payment, but you have been paying 1,200 a month on your previous home and you are committed to on this home to pay it down faster,and you have 7 or so years before your interest rare can fluctuate, you may be better off with the arm, even if your arm increases the max every year until it reaches its cap because you were able to pay down so much because of the lower rate and a higher amount going to principal. Not very many people fall into this category, so be honest with yourself if you are really going to do it a year down the road.
A fixed rate is the best choice for most people especially when rates are low. An Arm is like investing in the stock market, but instead of throwing a few grand at a risky stock, you are betting a few hundred each month for 20some years of your mortgage for a half percentage gain now. If you do still want to consider an Arm, make sure you understand when your schedule of when your rate can go up and how much the payment can be.

dgruzew:I am curious how anyone found a bank to provide a construction to perm that was NOT an Arm

In our case, it's contacting a lot of banks. Maybe we're fortunate to be in an area with lots of banks to choose from to begin with. We asked our builder what banks with which he's had good working relationships. We asked our agent to make similar recommendations. Then we added to that list our own bank and their largest competitor. I think we've got 10 or 12 banks on our list that we're trying to compare.

As you say, most we find are offering ARM. But a few offer fixed, but with a slightly higher than market rate. In the long run, that's probably worth it.

We've also made it clear that they're all competing for our business, and we're likely to move all our banking relationships to a single bank. There's not much new construction happening in these parts, so the loan officers have seemed real responsive to our inquiries.

Gotta get this part tied up real soon, so hopefully we'll have a decision.

I live in a rural, economically depressed area, so I went with the ONE bank that called me back. All other banks were uninterested in a construction loan, which I found extremely odd. My loan is construction to permanent. I can convert to a fixed at the end of construction, but I plan to keep the ARM. The rate is 3.125% for the next 5 years. The caps are 2% annually and 6% max. I'll be paying down quite a bit in the first 5 years. I think the real trick is figuring out what is the worst the rate/payment can possibly be based on the lifetime cap. If you're comfortable you can make the worst-case payment and/or plan to pay down a large hunk while the rate is low, then ARMs can work in your favor. If you hate uncertainty or can't make the worst-case payment, go with a fixed. Though fixed rates have gone up lately, they are still historically low.

oicu812 - so you found a single close fixed with a rate lock before construction ?

We went with a local bank and got a construction to permanent loan one-time close with 4%. We closed in August. We initially were paying down several thousand to get the lower rate. But, the bank messed up while we were in the approval stage, put some ridiculous figure for the loan into their computer system by mistake which automatically sent us rejection of loan letters. It was a mess. We threatened to go to a credit union who offered us the same deal but not really wanting to start the process over again. By this time the rates had gone up. Our loan originator fought for us and turned out the bank paid for all the fees for the lower rate. It wasn't fun going through all of that, but glad we stuck it out because this bank has been great working with us for every draw and we have a day turnaround of when we send draw info and when they send checks. Shop around. I called quite a few places to check rates, fees, etc. before we signed the dotted line.

Homestreet and 2 local chains all did a onetime close construction loan. If you are in the Pacific NW, BECU and Wa Fed also do them. We had no trouble finding one-time close loans in general but the construction length varied by 3-6 months so we shopped for the length plus lowest closing fees.

This post was edited by MFatt16 on Thu, Jan 9, 14 at 16:35