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Topic of the Day: How to pay for all this?
Term of the Day: Soft Costs
For anyone planning to buy land and build there's 3 major financial hurdles to contend with:
Land Purchase, Construction Costs, Soft Costs. Let's discuss each.
Land Purchase: OK, so you gotta buy the property first. You can get a loan for this but the rates are terrible and most banks wont deal with them. You can pay cash of course. Or, you can do what we did and dip into a HELOC on our current home to fund the land purchase. Our current mortgage is at 4.5% and the HELOC is at 5%. So immediately after the land purchase we will re-fi and roll them both into a new 30 year at a low rate. the key is to get your monthly payment as low as possible on all debts as the amount the bank will loan you for construction is a very simple monthly debt to monthly income ratio.
Construction Loan: These are "Hard costs." We are working with our bank on this. Lots of banks do them and they each have their own twist on things. The key for us was to begin working with the bank early, during feasibility, to see how much they could loan us in 2 scenarios. 1) we stay in the current house while the new house is built, then sell the current house. 2) we sell the current house to free up debt and rent for a year while we build.
Soft Costs: There's a period that's after you buy the land and before you begin construction where you have to work with your architect on the plans. You have permit fees, land surveys, taxes, assessments, and more. These all fall outside the direct construction and are considered "soft" costs. They can easily add up to 7, 8, even 10% of the overall budget and much of it falls outside the construction loan and must be paid before construction begins. if you are considering building, it's worth a long hard look at soft costs and if/how you can afford them!
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