Los Angeles Times Article on Construction Loans

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Loan is Trickier When Building Own Home
Los Angeles Times - Real Estate Section
Sunday, July 6, 2003
By Liz Pulliam Weston, Special to the Times

   Both have pluses. All−in−one loans have one set of fees and one closing, reducing the hassles for buyers, said mortgage broker Allen Bond of Palos Verdes Funding. Although many all−in−one programs convert the construction loan to an adjustable rate mortgage, some plans offer 15− or 30−year fixed−rate mortgages.
   But, shopping separately gives consumers more choices, because they can select from the thousands of conventional mortgage loans available rather than being restricted to the mortgages offered by construction lenders.
   This approach “lets the consumer wind up with the kind of loan they really want for the long term,” said Ginny Ferguson, vice president of the National Association of Mortgage Brokers.
   In either case, the interest rate on the construction loan is typically fixed for the life of the loan, which is usually 12 months or less, although some stretch for 18 months.
   The rate for people with good credit is usually the prime rate plus zero, one or two percentage points. You’ll typically pay 1% or 1.5% of the total loan amount in origination fees, Ferguson said, plus several thousand dollars in other fees to cover costs such as inspections so the lender can make sure the project is proceeding according to schedule, and title insurance, which tends to be trickier with new construction.
   “They take a big chunk” in fees, said Warren Christensen, a Los Angeles homeowner who recently paid $17,000 to get an all−in−one construction loan that replaced his mortgage and provided him $135,000 for a major remodel and addition. “The beauty is that you’re not paying fees again when you roll over, but it’s still a lot of money.”
   The higher cost reflects the risk of lending on an asset that hasn’t been built yet. There are also fewer construction lenders than there are mortgage lenders, so the market lacks the kind of competition that has helped drive down costs for regular home loans.
   Christensen, a publisher who, with his architect wife, has built or remodeled several homes in Los Angeles, recommends shopping around to get the best deal.
   “Go to a bank that does construction loans and a mortgage company,” Christensen said. “Go to three or four different places, because rates can vary greatly.”

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