Finance Question - Building a Home

This is a simplistic answer, but what is the rate on each mortgage? You'll get a better bang for your buck paying down the higher rate faster. You have a good amount of equity in your current home, so I wouldn't think that'd hurt you much at all and if the rates are similar you'd be better off putting it to the farm. Honestly, I think you're sitting pretty good and this sounds like a humble brag.

Interest rates are nearly identical.

Dealt with a similar situation. I assume you plan to stay in your current house while you build your farm house, correct? How long will it take to build your farm house? How much will it cost and how certain are you of the upper limit on the cost to build your farm house? Do you plan to move to your farm house as soon as it is done? What do you plan to do with your current home when you move to the farm house?

What you could do is pay off your current home in full and take out a home equity line of credit on it. Tap into that as needed to build your farm house. You will get a better rate on a HELOC than a construction loan. Plus, you only pay interest on the current balance of a HELOC, so you aren't racking up huge interest charges like you would with a typical construction loan, where you get all the money up front and pay interest on the full amount from day one. Another advantage is that you don't need to have 50-75k in cash on hand. If you need those funds for an emergency, you just tap into the HELOC. So you cover your risk concern without the opportunity cost of 50-75k in cash making .1 % in interest. Another advantage is that assuming you itemize your deductions, you write off HELOC interest but I don't think you can write off construction loan interest (not positive on that). You typically can get a HELOC for 80% of your equity. The key downside is that HELOCs usually have a term and the balance can be due in full after, say, 5 years. So you would probably want to wait to closer to starting building before you take out the HELOC and time it so the term ends well after building is completed. Then, assuming your HELOC has a term and it all comes due, you can pay it off by selling your current home or by refinancing your farmhouse in which you preamble will have even more equity.

This plan worked for me and, from what I calculate, was a big savings.

Another option for you that would be more analogous to a construction loan is to refinance the land before you build and pull out the equity to pay for the building. The reason to do that instead of a construction loan is that I think you will get a better rate. Not positive about that.

Another key thing I learned is that if you decide to take a construction loan (which I did not do), you need to do it before you start building. Banks won't give you a construction loan once construction starts because they want to be the first creditor and not secondary to the contractor, who usually will put a lien on the property when building starts.

If you answer my questions above, I may have more thoughts.

I can't answer your financial questions but I can give you this advice: don't put a builder home on an old farm. Hire an architect and build something that fits, rather than buying a cookie cutter floor plan.

Don't use vinyl windows.

Don't use laminate wood floors.

Don't put your garage in front of your house.

Don't paint it beige.

Thank you for that nice response! I did consider a HELOC. Here are a few points to answer some of your questions:

- We plan to sell our current house, build, and the new farm house we plan to build will be our new home. That's the ultimate plan.

- According to tax law, the interest on construction loans (and even vacant land where you plan to build a house) is tax deductible starting two years prior to living there, so we need to be good at counting backwards and planning.

- We are going to use a farm bureau that will actually be able to finance the entire new property for us without the LTV restrictions of a big commercial bank.

- We are currently getting 1.0% on our deposit funds in a money market account at a credit union. Not huge, but better than zero.

I may have missed a few of your questions. Let me know if I did. Thank you again!!

Resident Architect wrote:

I can't answer your financial questions but I can give you this advice: don't put a builder home on an old farm. Hire an architect and build something that fits, rather than buying a cookie cutter floor plan.

Don't use vinyl windows.

Don't use laminate wood floors.

Don't put your garage in front of your house.

Don't paint it beige.

Posted the dream killer. The micro-estate is the new split level.

Simplistic Answer wrote:

Honestly, I think you're sitting pretty good and this sounds like a humble brag.

You are very right. We work(ed) very hard, have lived a simple life, but above all else we have been fortunate and very much blessed. We don't have the income of some but we live within our means. I am proud of what we have but I in no way meant this to be a humble brag. For that you need to search for the "I make $450k per year but feel broke" thread from yesterday. Still, point taken.

Resident Architect wrote:

I can't answer your financial questions but I can give you this advice: don't put a builder home on an old farm. Hire an architect and build something that fits, rather than buying a cookie cutter floor plan.

Don't use vinyl windows.

Don't use laminate wood floors.

Don't put your garage in front of your house.

Don't paint it beige.

I completely agree with you - no cookie cutter here.

We actually have a list 2 pages long of the small things we plan to incorporate and these things are covered on that list. Great points!

We could build today but there is a reason we are not going to do that, and it is mostly because we want to be patient, build the right thing, not just build something. Waiting will allow for fewer regrets (but I know we'll still say "if only we had....").

This house will likely be where we live until my son hauls us to the old person's home.

Where do you plan to live while you build the farm house? How much are you going to spend and how long will it take to build?

Builder wrote:

NRR question -

We live in a very inexpensive part of the south and currently have a home worth ~$250K and we owe about $130k on it. The all-in monthly payment is $1,000.

What about renting a small place for a few years and storing some stuff while the house gets built? It's probably not the right decision, but you basically have a ~$120k investment in a single house if you aren't going to live in forever. You can weigh your own risk and the possible best/worst scenarios of selling the house now, but if the housing market pulls a 2008 in two years, you'll lose a lot of money or be stuck living in/holding/renting your current house. Maybe you sell today, rent in the meantime and hold that $120k for building funds in money market or safer two year investment.

The last two posts relate to the same subject - where we would live in between the move from the existing home and the new build.

Both of our parents are local. My parents are closer but have a smaller house. My wife's parents aren't too far away and have a much larger house. Neither my wife nor I really want to do this but we do understand it would be temporary.

I do own a small number of rental houses. Not my first choice either because I would hate to evict good tenants. I've always said that I would never buy a rental that I wouldn't live in myself, but at this point in life I'm not sure that I could do it.

Like many others, we could simply try to time it all out to where we sell the current house at the right time prior to the future house being built. This almost never works out and wouldn't help in the loan application process unless I had at least one of the notes paid in full.

A HELOC is also a good option but it sounds like a lot of your decision is going to come down to timing and where you want to live in that interim period. Sorry if I came off harshly earlier. Sounds like it will be a kick ass situation when the new house is done.

If you are selling your current home when new one is built, in my opinion you'd be better off paying down the farm. If you own that outright, you will have zero issue getting any type of construction loan you'd need as the bank's risk would be minimized and you will be able to get max loan/lowest rate depending on what you want to build. HELOC if your life collapsed you could end up losing both properties.

considering the amount needed to build your new home, I don't see that as available with your current liquidity. It *might* be doable with a HELOC, but depends on where you are (don't recall you stating that), as build pricing *does vary considerably.

I'm currently building a 3100sq ft home on the california coast and we're closing in on $200K...and we haven't even finished the retaining walls. Dozed the house (we did save a 500sq ft master suite, but only the foundation & floor system, no walls), graded the lot, and poured around 325ft of retaining walls. Between that and permits, the owners have almost $200K into the build cost (not counting the $600K they paid for the lot/house).

We are under the Coastal Commission here in CA, so that adds a big wrinkle, one you probably won't have to worry about. Also, being out on a farm, I trust you won't have to deal with an environmentalist neighbor trying to file "stop work" orders to hold up your project (we've dealt with this twice, which didn nothing to help the environment, aside from costing the owner time, money, and headache, filing extra paperwork to fight back- we won both times).

The home itself is expected to run around $350-$400K, and that includes a 750sq ft garage. Obviously foundations and framing are more costly here due to earthquake requirements, but keep in mind that I just can't see a nice 4bdrm/3.5ba going up for much less than $200-$250, almost anywhere... Not sure if you can obtain that kind of cash outside of a const loan, but if you can swing a high% HELOC and dwindle your savings down to your $75 personal threshold, might be worth trying to save that interest hit. good luck and feel free to post here again, I'll try to look at this over the next couple/few days.

cheers.

Thanks, guys - excellent advice here and I'm taking notes.

The requirements in CA do not sound fun at all. There is a lot to consider in that part of the world but the CA coast sure does beat a farm! I couldn't imagine dealing with stop-works, coastal restrictions, or earthquakes - not to mention everything costs so much more! More power to you brother! It would be more than worth it to live out that way, though.

FYI - we plan to build in about 4 years, which would be before our son starts school. If we can save $5k/mo. (today's savings assuming no raises/promotions at work, which is highly unlikely) for 4 years then it is just a matter of where the money be applied, not whether or not we can afford to build.

We currently plan to build a one-story house no larger than 3,000 sqft with an attached two-car garage and a detached garage/barn. That will be plenty for us. Costs / sqft are a lot less where we live.

Thanks again to all who have posted!

I'm curious. You say you live in a "very inexpensive part of the south". Yet you say your home is valued at $250K. That seems like a lot for a "very inexpensive" area of the south based on everything I have read and heard about the South. I don't necessarily want to know specifically where you live. But can you give me an example of what is a more expensive area of the south compared to where you are. Or, do you just have a very big, nice home?

I live in Portland OR, so I have become fascinated how home prices are all relative. I think Portland is expensive. $600K for a house is fairly common now. Yet tons of people are moving here because it is cheap coming from where they are (i.e. Bay Area, LA, NY, Boston).

Ryan,

Where we live in the country there could be a mobile home on 2 acres of land on one side of the road and a 5,500 sqft brick house with a pool on 10 acres of land on the other side of the road. The mobile home would likely sell for $60,000 and the big brick house would likely sell for $700k.