We have all dreamed of buying that beautiful piece of property and building our dream home or cottage. Once we start to think about how to pay for it – sometimes we stop dreaming and get back to reality. But many people are doing just that with construction draw mortgages from a few lenders.
It is called a construction draw mortgage. Here’s how it works. Whether you want to buy the land and then build or you have a piece of land you have owned for awhile and now want to build there are options. If you are buying the land and building the maximum loan will be 65% of the value of the land to help with the purchase. If you own the land already you can take equity out of the property to 65% of the value.
In the above situation the first advance of funds for the construction (based on the estimated value of the completed house on the land) can be assessed depending on the funds available from the owners own cash to bring the construction to 40% complete (airtight). In some cases we can insure the mortgage and give a single advance of 15% once the excavation and foundation are complete before the next advance to 40%. Future construction draws are at 65%, 85% and 100% as applicable. The draws are set at interest only payments based on prime lending rate plus 1% typically. They are set for a limited time – usually 15-18 months for construction as part of the construction draw mortgage portion and then locked into a mortgage rate upon completion.
At the end of construction phase there will be an appraisal and at each draw there are usually fees for building inspection.
Some lending policies differ by institution and checking with your mortgage broker for the best construction draw mortgage options in your situation as much in advance of buying the land or designing the home build is important.
But soon enough you will be in your dream home!