Hey there!

We are closing (as in we're done building) on our construction loan tomorrow. We originally did a one-step loan (construction to perm) with one set of closing fees. We decided this at teh beginning because we did not want to be at the mercy of the market when we were done building. When we got the loan, interest rates were on the rise and didn't want to chance it.

Since interest rates went down (two months ago when they were at their lowest) we ended up refinancing the permanent rate (with a 60-day lock). Of course this meant another set of closing costs but with interest rates so low it was silly for us NOT to refinance (We ended up saving about $500 a month).

However in your case since you are probably getting a really good rate NOW I wouldn't chance what the market might be in a year from now.

If interest rates drop considerably towards the end of your construction period, go ahead and refi. The few costs you may pay will be worth it if you end up saving hundreds a month.

HTH

I'm no expert but based on the fact that mortgage rates are currently at near historic lows and the government is pumping billions of dollars of new money into the economy (all those stimulus package bailouts), I think we're going to start seeing inflation VERY soon - double digit inflation in fact.

If so, mortgage loan rates will rise with inflation. My personal suspicion is that your banker also foresees inflation coming and he doesn't want you to lock in today's low rates by getting a one-time close loan because such loans are very tough on the lenders. Your banker may look for the "best rate" available for you when your construction is done, but I strongly suspect that "best rate" won't be nearly as good as what you can lock in right now with a one-time close. Keep in mind that your loan is a business transaction for the bank. The bank wants to make money off of it and your banker has the bank's best interests at heart, not yours.

As for possible over-runs in costs, if you're doing a "fixed price build", the only cost over-runs should be from "change orders" and I highly recommend paying for any and all change orders "out of pocket." That is one sure-fired way to keep yourself from going overboard on changes. LOL!

Well - I was in the same boat as you and went with a construction loan for the reasons mentioned. We should be finishing in August so not terribly worried about inflation. I wasn't worried about cost overruns but I was annoyed by the options in the C-to-P loans. Yes they gave you some security on the final interest rate but it wasn't a particularly good rate. You also were dependent on just a few banks. I rather like the idea of being able to shop around at the end.

I was in a similar position, & I am in the process right now of finishing the mortgage process & from what I have expirienced and been told and not told, I think you would be best off with the one time close construction loan. Two reasons why, first - rates are most likely as low as they are going to get, or will not be any lower a year from now, second - you don't know what you house will appraise for a year from now, and if it is lower, you may have a harder time refinancing. The second is why many banks have dropped their construction loans totally. Too much risk. The danger with the one-time close at the beginning is overages and many banks are asking to show a reserve of 10% for overage. Also many banks have raised their minimum downpayment to 20% to not give PMI on a construction loan.

One other thing to consider is that they keep tightening lending requirements, so the loan you qualify for today might not be there in 6 months.

I used to like the 2 time close loans better (I am a mortgage broker), because you could do another appraisal to get more money in the loan if there were overruns. But in this environment I would go for the sure thing. Nothing is more stressful then finally getting the house done and not being able to get permanent financing.

We chose a construction to perm, one time closing fee. Our rate is capped at what was a reasonable rate at the time (November 08) but seems high now. We have a one-time float down option within 60 days of modifying to the perm loan.
In our area we were concerned about the falling prices of houses in our area and not getting the appraisal we would need to apply for a new loan. We also knew we might carry a balance on our credit cards for appliances, lighting, etc that could affect our credit score. We're hedging our bets by finishing our basement out of pocket in case we ask for a reappraisal to refinance for a lower interest rate
The nicest thing about our loan is that we KNOW we can afford our interest rate and aren't distracted by watching the markets like we did before we locked. That takes a load of stress off. Our house contract is a cost not to exceed, so that's set in stone as well.

Thanks so much to everyone for your advice. I talked with the loan officer and insisted that we lock in our rate and requested a construction to perm loan. I will watch the rates and if they go down before we close, we'll go the refi route. I really appreciate the help!