You really need to sit down with your banker and discuss all of your options. Or better yet, talk to several banks and discuss all of their options too. You can do a construction loan in several different ways, but from your question it is apparent that you have never been educated on what those options actually are.

Firstly, if you "borrow" $300K but build the house for $200K, then you didn't actually borrow the higher amount. You had a note that would have enabled you to borrow $300K. Construction loans are paid out in disbursements...not lump amounts upfront. So, there wouldn't be any extra money to give back or to put toward the mortgage. Your construction loan is simply modified when you convert to your permanent loan based on the actual amount borrowed. This is for a 1 time close loan.

Secondly, while your builder is correct that you can "borrow" $300K and then pay it down later, are you certain that you would qualify for a $300K loan?

There are too many variables at play in your question to answer it adequately. One thing is for sure, you can buy a lot of "points" with $100K...

Another thing to keep in mind is that there will be 'cash' outlays, possibly during but definitely after the build. Depending on your contracts, you may pay separately for site clearing, tree/stump removal, driveway finishing (such as concrete/brick/aggregate to smooth out the ruts), retaining walls, overage on earthmoving (such as digging the foundation or shoving dirt for the driveway), wells/septic fields, fencing, insurances, handling fees [bank], landscaping, exterior finishes, drapes and blinds, and... more. Applying 33% of the expected cost towards the loan is good, but many times you will need another 25+% to cover all the stuff that isn't/won't be in the mortgage contract.

Go on-line and learn the definitions and usages of terms such as ARM, discount, points, and amortization... all the jargonese to do with loans. You don't want to have a blank stare when the lender starts using those words. After you are comfortable with those terms, then do as dixiedoodle says, sit down and go over the figures - in detail -- with several different banks/loan institutions. This doesn't waste their time because you are showing responsibility in wanting to understand all the possibilities. BTW, get their figures in writing -- a mathematician or a loan officer might remember who quoted how much for what for how long after listening to a half-dozen different presentations, but the rest of us need to have hardcopy to study later. Be very aware that rates they quote for today may change tomorrow, but you will gain a feeling for the institution's attitude when it does its business, and how good its rates are when compared to others.

As also said, a mortgage is an option to borrow [up to a certain amount], it's not cash into your hand. However, you will be expected to pay -with interest- all the monies that are disbursed to the various contractors and suppliers. The interest paid plus the assorted fees are how the bank makes its money... study carefully to see what is to be paid, and when, and how the interest is computed and on what and when. And keep in mind that interest compounds... every dollar you borrow is going cost you from three to twenty times as much to pay back.

It can be done as cash in hand, though, where you walk away with the difference between your mortgage and your actual build cost. The house has to appraise for the full mortgage amount, and you have to qualify [income wise] of course.

If you end up in that position, make sure you have no penalties for early payment.

Some building loans have built in deadlines-- payment isn't made until certain benchmarks are reached. It can be a useful way of keeping your builder on schedule.

I would say it's a whole new world out there with the current financial situation. That means it's more important than ever to discuss the details with your banker/mortgage guy and to seek multiple opinions.

I'm hoping to close on Monday and I truly believe the whole loan situation is morphing every day. Assumming great credit scores and down payment, there is still the question of who will give a loan and who has the cash to give a loan. Yes, some banks literally don't have the cash to give a loan.

Hi Becky,

Many great points to consider from the previous responses. We have a $400,000 loan but ended up doing so much of the work ourselves. We will come in approximately $50,000 - $75,000 UNDER budget (yay)! That money, since it never was drawn from the bank, will just lower our permanent mortgage when it rolls over. I had asked at the beginning if we could "give" the money back even if we actually drew the money but did not use it (which happens each month for us). YES, we can. As long as we "give it back" before it rolls over. That's just our bank and I would certainly make sure before you borrow from yours.

Also, we pay about $5,000 - $10,000 out of pocket each month (we are GCing our own project). I just pay us back when we get our bank draw, never having paid any interest on our credit card. :)

It's nice to have a cash cushion while building as the bank will not pay for anything until it's actually installed. So... when your $30,000 cabinets are ordered and require a 50% deposit the bank will not reimburse you (or your builder) for them until they are installed in your house. Your builder should incorporate these things into the bank draw sheet though and "pad" the earlier phases with extra money. You end up drawing a little more maybe a month or so ahead but then the cash is there when needed for those big ticket items that require a deposit.

The bank stuff made me sick to my stomach... I checked rates DAILY for about six weeks before we locked in. Just make sure you do your homework and ask questions. Hope this helps!