Some people working on a custom home project believe that because they’ve already secured the financing for their custom home, it means that they can file it away and forget about it; this is entirely false, and they need to determine whether to keep the permanent loan that they secured after their construction financing or consider new home refinancing.
New Home Refinancing as a Solution
Many people refinance their mortgages within one year of finishing their custom home’s construction. Even though many construction loans come with long-term financing already in place, lives change and unexpected opportunities appear. Wanting more cash, making life changes, or simply working toward smaller monthly payments can all be excellent reasons for re-examining the financing process.
When thinking about raising cash by taking a new loan or new home refinancing, remember to manage your money wisely. Taking cash out to invest wisely (on improving your property, on buying stocks or securities, or on paying down credit card debt) can be wonderfully rewarding. Taking cash out to spend irresponsibly (on an expensive vacation, on a luxury car, or on a snazzy new home-entertainment system) only brings you one step closer to financial ruin.
A perfectly good reason to consider new home refinancing is directly related to the term — that is, the duration — of the loan you received at the end of construction. If your construction loan was a single-close loan, then you may or may not have had a choice in the type of loan that replaced your construction loan when your home was finished.
However, you must not jump blindly to the new home refinancing idea, you have to know a few things about the procedure before starting it, such as the fact that you aren’t the bank’s customer, the banks view new custom homes differently than existing homes, or that rates and fees are only part of the big picture.
The Banks’ View on New Home Refinancing
Large banks actually see very little money from the interest and points on the residential loans they make. After funding the loan, banks sell most mortgages to investors (the banks’ true customers) within 30 days of funding (the date a check is cut to the borrower). Except for the rare case where banks put loans in their own investment portfolios, they make their money on the difference between the rate you pay and the rate required by the investor. Also, banks continue to manage your monthly mortgage payments — sending you monthly bills and processing your payments, and the investor pays the bank a quarter percent annually for this service called a servicing fee.
With a conventional new home refinancing, the bank generally loans you money based upon the property’s current market value. If you bought the house within the last year, chances are that your bank will use the sales price to determine that value. This time frame is known as seasoning. Banks generally frown upon the idea of letting you take out cash when your house isn’t seasoned unless the loan-to-value ratio (the amount of the loan divided by the house’s value) is significantly low enough to meet their standards.
Although rates and fees are an important element in the big picture, they aren’t everything. In order to get the most from a mortgage, you first need to seriously assess your own unique financial needs. The loan you select is guaranteed to have a major impact — either positive or negative — on the entirety of your financial health. If you want to avoid financial problems, then be sure you pick the loan that is right for you. Your mortgage is usually connected to your largest asset, your biggest payment, and your greatest liability. Seek the proper professional financial advice for the new home refinancing and act on it.