This afternoon, my wife and I had our most expensive date ever!
We closed on our construction loan!
Getting this loan was a long and painful process that involved an appraiser, our insurance lady (that we ended up dumping because she was messing everything up) and a few other big surprises. I plan to document more at a later date, but here are the basics of what happened recently.
Last week, we had asked for an updated estimate of the closing costs. Of course, there were all the usual “fees”, including flood inspection, etc. The biggest of the recent surprises was that the bank wanted us to deposit all the money we planned to use, up front, in their account, so they could manage the disbursements and make sure it all goes into the construction. The difference with this latest update was that the bank added 10% more to cover “unexpected costs”. This was a significant jump that had not been included in previous discussions (they had been willing to accept that I had built safety factors into each line item). We scrambled to figure out how to scratch together the additional money (imagine suddenly needing to find 10% of the cost to build your home).
We could have swung it, but I was worried about our shrinking liquidity (I still need to buy tools, rent equipment, etc. and those costs are not covered by the construction loan). We ended up deciding to take some money out of our retirement savings plan. We will need to start paying it back to ourselves immediately (it starts coming out of my next pay check) or face a tax penalty, but the interest rate (to ourselves) was good and there were no significant fees. It was actually a pretty painless process and we put the paperwork together in about 20 minutes (Sherri and I working together). We took a bit more than we thought we needed, just in case. That check arrived yesterday.
Today started with Sherri still up from the night before going over the receipts that we have already paid. I gave up and went to bed at midnight, but I assume she checked everything more than twice more (as is her nature). These receipts are required to support our “Sworn Statement” that says how much we have paid and how much we have left to pay.
We showed up for our lunch time appointment at the bank today with a big accordion-folder worth of paperwork.
The first biggest surprise was that we were expected to pay off the remaining mortgage on our land before the new loan would commence. I had thought our land may come up since the appraisal was based on the house and land and I figured it may occur to the bank that they had already loaned us something, but I thought they would take the money out of what they were going to loan us now. Instead it was added up front as closing costs before the other loan would go through. Ouch. Good thing we had more in the account that we thought we needed. But this is a significant cut to our liquidity.
The silver lining is that we now own the land outright and no longer have that land payment. Also, the new mortgage percentage went down a bit from the last estimate, so in the end, our payment is very reasonable (over 30% lower than we thought it would be for the house and land payments combined).
We spent over an hour signing papers. Sherri is very thorough and likes to read everything; she found a number of mistakes, including her name spelled wrong several ways on a single page. The lady at the bank had to make a number of runs back upstairs to reprint documents with corrections. She was getting a bit tired by the end of it.
Eventually we got through it all and the Earth Sheltered Umbrella Home is fully funded.
Sourcing
I finally got the bill for the footings today. It was a volume plus materials sort of deal, so I was a bit nervous about how the cost of materials would add up. However, it did seem reasonable. I am not thrilled about all the unused forming supplies that I bought. I hope they don’t get wrecked by the weather before we can use them on the main floor footings (I have them covered with 6mil plastic at the moment). The cost of the concrete was 6% lower than expected and the giant pump truck was 14% lower than expected. Unfortunately, the rebar and other steel was 17% higher than expected, probably due to that 18% bump in the price of steel over the past year. Overall, we are still on budget.
I also purchased a new 26ft tall scaffold tower today. I had been trying to get a used one. There were not many to choose from and most looked like rusty pieces of junk. The worst part was they were priced only 30% below new. I found one nice aluminum one for a reasonable price, but I called the guy and he had sold it for scrap. In the end, I needed one next week, so I decided to pay a little more and get a brand new one, and that was for a “delux” model with the extra wide outriggers and other safety features. It should arrive the middle of next week along with my steel studs (which were originally supposed to arrive last Friday). I should be able to sell it at the end of construction for a reasonable price.
I had also been looking at buying turnbuckles to help me plumb the steel stud walls (tricky because I don’t have a top track to attach to). I was looking at the sort of thing that ICF installer’s use to straighten and plumb their walls before a pour. I found them to be very expensive, so I designed my own and priced it out. I figure I can make equivalent hardware for less than 1/10th the price of buying them. The only catch is that I will need to buy that MIG welder sooner, but I planned to get it for the main floor steel anyway.
I have a 25% off coupon for a nice MIG welder (another thing I couldn’t find second hand), and will probably pick that up this weekend.
Construction Birds
Some of you may have caught my video on the river swallows at the construction site… Here it is anyway.
Eye Candy
Yes, time for some eye candy.
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As I prep for my electrical work, this struck me as funny…
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When I saw this Cow on the roof, all I could think was, “I bet he wishes that was an earth sheltered roof.”
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I like these leaf pavers, may be a fun thing to do with any extra concrete.
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I also like the idea of a drill bit for tying the rebar.
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An interesting tool for tying rebar…
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A Bank swallows nest
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Another S-type quonset hut similar in size to my own (which I ordered last week)
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This Quonset hut looks big, but it is actually an S30x40. Perhaps this one is 17′ high, mine is 15′.
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I liked the simple design of this turnbuckle… In inspired my own (totally different) design.
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This is the 26ft tall deluxe scaffold tower I bought this week. Should be pretty scary to work at that hight.
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My extra “forming supplies”. Actually, the pile is bigger now since they stripped the forms and put those boards back on the pile.
Perhaps you have a rich aunt Myrtle who died and left you all her money just to spite your cousins… Or perhaps you live in an area that lets you dig your earth sheltered home slowly as you find money? Maybe you are going to build an earth sheltered home for only 50$? Or perhaps your plan is just to save up and build in your golden years… I can’t comment much on those plans.
But if you plan to get a construction mortgage, maybe this page will help…
(Note: this is a placeholder as I am learning some valuable lessons the hard way. Once things are all sorted, I will come back and add some details)
Insurance and appraisal
One of the requirements for closing on the loan is to get the home insured. This is the same policy that will eventually become my regular home insurance, but in the mean time, it also provides coverage as we build, including coverage for onsite injuries and theft of tools or materials. It is reasonable for the bank, who is paying for most of the project, to want us to insure the site and the house afterwards. It was our insurance agent who was being unreasonable…
Embarrassed about the numbers
I am actually still waiting on the appraisal (should know early next week). This is a quiet time to crunch numbers and prep for the closing on the loan.
I wanted to blog about bank loan numbers and how I made my decisions (in case it is helpful to others), but I am a little embarrassed about how much I plan to spend and about how the new house will be double the size of my current one.
We live well within our means. We buy used cars and my current one is 14 years old, we don’t own any fancy electronics (we don’t have an i-anything), my wife has a 3 year old laptop and a free flip phone with a minimal plan. My computer and cell phone actually belong to my work, etc. We do not try to “keep up with the Joneses.” On the other hand, I do have a good job with a good salary and regular bonuses. And the house needs to be large enough to have an office (because I work from home), school room (since we plan to home school) and room for visitors (since our guests come from far away and usually need to spend the night)…
Anyway, my solution is to pretend that I am going for a $100,000 loan so you can see the relative amounts without thinking too badly of me.
Here is the mortgage situation…
In the aftermath of the housing bubble, a lot of banks were severely burned. The first thing they stopped doing was making construction loans to crazy people who wanted to build earth sheltered homes, especially if they wanted to be their own GC. There may be a few more doing it now, but back when I was shopping in 2009, there was only one company willing to do it, GreenStone Farm Credit Services. They had not played the games and were in very good shape after the crash. We used them to buy our land and now we are just a few days from hearing back on the house appraisal to see if we will get our construction loan.
The Construction loan starts with a 4.25% variable interest rate. That is normally not something I would risk, but it is only for a year and it has been 4.25% for a very long time. I would get a line of credit and monthly payments would be interest only (no principle) on the money I already spent. In June of 2015, the loan would automatically convert over to a 30 year mortgage at a fixed rate without any additional closing fees (they are built into the upfront fees).
There are two problems.
1) Green Stone charges higher interest than anyone else I can find. At the time of writing, the average mortgage rate for a 30 year fixed, 0 point mortgage is 4.44%. Greenstone’s rate for the same mortgage would be 5.15% That makes a big difference in terms of your monthly payment and total interested paid. When I called them up and asked them why I should pay such a high rate for their loan, they said they offer better service (which is true), and that they wouldn’t be selling my loan to anyone else (which doesn’t bother me). They also mentioned the patronage program, which has paid about 0.5% back over the past few years, which made their rate half a percent better than it appeared. They didn’t say it, but I guess they know I am not going anywhere right now anyway.
2) The second problem is uncertainty because we don’t yet know what the interest rate will be 1 year from now when it kicks in. My insurance guy is pretty sure it will go up, but that is because he wants to sell me something called a “Rate Commitment Fee”. This fee is 0.75% of the total loan amount and would allow me to fix the rate where it currently is. We are talking thousands of dollars betting that the interest rate will go up… I had to crunch the numbers.
Using my fictitious $100,000 loan amount, the “Rate Commitment Fee” would be $750. So I looked at what the 30 year mortgage would be at the current 5.15%. I put in a column for monthly payment and one for total interest paid (if I paid for the 30 years).
Of course, I also ran tables for how much quicker it could be paid off if I tossed in an extra few bucks a month (I did a full table with a row for each additional amount). I totally plan to do that, so I hopefully wouldn’t get hit with the total interest numbers shown here… I also compared with the lower rate for the 15 year loan which would save even more money, but we decided that while that was doable now, it could make things more difficult if I lost my job (its not flexible enough)…
Then I considered what could go wrong… I created rows where I increased the interest rate to 5.5%, 6% and 6.6%. I looked at how that affected the monthly payment and the total interest paid. Then I calculated how long (in months) it would take me to pay off the “Rate Commitment Fee” as well as the total savings for each scenario… The chart looked like this (rough no formatting ;^)
So, what this is saying is that if I pay the 0.75% “Rate Commitment Fee” and the rate only goes up by less than half a percent, I would still end up better off in less than 3 years and I save a considerable amount of interest (nearly 10 times the fee) in the long run. If it goes up by almost a percent (which is the most that I really think is possible without a major world shift), the fee would be paid off in 14 months and I would save more than 20 times my investment in interest… In other words, if I think there is any chance that the interest rate will go up, the good bet is to pay the Rate Commitment fee…
So, is there a chance that the interest rate will go up? I don’t think so. Obama is working to raise the minimum wage. The natural effect of that would be inflation which would automatically lead to higher interest rates… But there is nothing natural about an election year. Obama and the Democratic party will be working hard this year to make sure that the Republicans don’t get to say, “I told you so.” about an inflation until after the election. Eventually, I expect the interest rate will go up based on market forces driven by a decent economy and increased minimum wage.
So, I do NOT plan to pay the Rate Commitment fee. But I will want to lock in to a fixed rate before the economic forces to kick in in 2016.
Hedge my bet?
After my construction loan is complete, I will have a normal mortgage on an existing house. There will be lots more banks that would be happy to talk to me. The “Rate Commitment Fee” is close to the amount I would spend on refinancing my mortgage if I decided to go with another bank… Other banks are more than 1/2 a percent lower than Green Stone. So…
If rates go up in a year, I can use the money I didn’t spend on the “Rate Commitment Fee” to pay closing costs to another bank to get a mortgage at a lower rate… Even if they don’t go up, I may still want to do that… I’ll do that math when the time comes.
We could have swung it, but I was worried about our shrinking liquidity (I still need to buy tools, rent equipment, etc. and those costs are not covered by the construction loan). We ended up deciding to take some money out of our retirement savings plan. We will need to start paying it back to ourselves immediately (it starts coming out of my next pay check) or face a tax penalty, but the interest rate (to ourselves) was good and there were no significant fees. It was actually a pretty painless process and we put the paperwork together in about 20 minutes (Sherri and I working together). We took a bit more than we thought we needed, just in case. That check arrived yesterday.
Today started with Sherri still up from the night before going over the receipts that we have already paid. I gave up and went to bed at midnight, but I assume she checked everything more than twice more (as is her nature). These receipts are required to support our “Sworn Statement” that says how much we have paid and how much we have left to pay.
I also purchased a new 26ft tall scaffold tower today. I had been trying to get a used one. There were not many to choose from and most looked like rusty pieces of junk. The worst part was they were priced only 30% below new. I found one nice aluminum one for a reasonable price, but I called the guy and he had sold it for scrap. In the end, I needed one next week, so I decided to pay a little more and get a brand new one, and that was for a “delux” model with the extra wide outriggers and other safety features. It should arrive the middle of next week along with my steel studs (which were originally supposed to arrive last Friday). I should be able to sell it at the end of construction for a reasonable price.
