Various options come into mind when financing your homestead. You may want to go with a mortgage or traditional loans. But either way, doing your proper research on what way you want to finance your homestead is a must. Let’s talk more about this down below.
Land Loans Vs. Mortgage Loans
- Looking at real-world stats, land loans are riskier compared to mortgage loans. Why? Because the value of raw land is less than the value of a house. There is no guarantee that the bank will receive their money back for the cost of land. Because of this risky option, lenders will require a 25% down payment combined with a higher interest rate and a maximum of 5 years to pay before it’s due. A lot of banks have used this style of lending but there are others that do not. With that said, here are two options for you to choose from in case your bank offers it.
Option 1: Finance the Lot and Keep Your Cash to Build
- If flexibility is your concern, this one is the better option since it allows you to surpass the bank’s given timeline for the building. Another good thing about this one is you have a fixed budget which enables you to create financial accountability if the cash you have on hand.
- However, the only downside of it is the fixed cash. The building process will struggle especially if the cash is not fixed on a realistic number. Thus, creating a limited time to finish the build before it’s too late.
Option 2: Property Purchasing and Getting an Owner Construction Loan
- With this option, the land is all yours for the keeping. Do anything you want with it and the deed can be handed over.
- Despite this good news, once there is no cash left, you would put yourself at the mercy of the bank. The banks can control the completion of your build, allowing them to choose their own timing and amount of cash withdrawals and building schedule. If ever the house is not yet complete on a given period, steep fees may apply.
Option 3: Seller Financing
- If you already found a property and have made a deal with a realtor, this third option is for you. This option will put you in a better situation for such negotiation. What happens here is the seller will be willing to take your offer whatever the price since they would be regaining interest on your payments for the coming years to come or whatever timeline you have set. The benefit of this is that the overall cost of the land will decrease, as well as eliminating some additional bank fees. So if ever you paid a 25% down payment, lenders have met the bank’s interest rate of 5.5% without any penalty for paying early. Once you default the payment by the end of the timeline you’ve chosen, the land is all legally yours.