Lot Loans and Construction Loans Explained
Financing
As of early December 2022, Fidelity’s lot financing is 5.2% which is set on a 3 Year Call / 10 Year Balloon. Based on an Array lot price of $210,000 with 25% down, or $52,500, the amount financed would be $157,500. The Monthly Principal and Interest Payment would be $1,685.97.
Fidelity’s 5.2% rate for land purchases is up a bit but their rates are very good and better than most other lenders. Historically, Fidelity’s land rates have been in the 4% range, even when home mortgage rates were at or close to 3%. Most lenders do not do lot financing and those that do have rates closer to 7 to 8%.
If an Array buyer wants to close on their lot and start building within the following 12 months, Fidelity can structure the lot loan on a 12-month interest only note while you work through the process with your builder of finalizing a full set of plans, specs and contracts. With interest-only payments the monthly payment would be $682.50 rather than $1,685.97.
Construction Loan
If you choose to get a construction loan with Fidelity, It is a one-time close upfront. At the end of construction, the loan automatically converts to a home mortgage, no other closing is required.
It is possible to close on the lot and construction loan together rather than separately. To do this together, you need the full set of plans and a final price for the project.
The construction loan requires 20% down and a minimum 700 Credit Score. During the construction process, the builder will make draws against your loan. You would pay the interest-only portion of the loan during construction. The interest only payments rise as the builder is advanced more money throughout the process. Fidelity inspects the home before each additional draw.
For example, the numbers below are estimated Interest only payments through the Construction Phase based on a 6.25% Rate at different break points as the loan is being advanced. These numbers go up to $1M for example only. This will give you an idea of what the payments would be based on how much you are getting as a loan.
$100K
$520.83$200K
$1041.67$300K
$1562.50$400K
$2083.33$500K
$2604.17$600K
$3125$700K
$3645.83$800K
$4166.67$900K
$4687.50$1MM
$5208.33
You do not pay interest on the full amount until the very end of the project.
Once your home is built and the loan converts, you pay the Principal and Interest Payments and rates based on your loan type, i.e., 5/5, 7/1 or a 10/1 Adjusted Rate Mortgages (ARM). Rates are Priced at Par meaning NO Points to buy the rate down, and there is NO Escrow. Fidelity does have an option to buy down the rate and many buyers are opting to do this today.
Provided below are numbers for the Principal and Interest Payments base on different loan amounts and the three loan types.
$800K | ||
|---|---|---|
5/5 ARM | 6.25% | $4987.14 |
7/1 ARM | 6.375% | $5048.74 |
10/1 ARM | 6.5% | $5113.70 |
$1MM | ||
|---|---|---|
5/5 ARM | 6.25% | $6230.18 |
7/1 ARM | 6.375% | $6310.93 |
10/1 ARM | 6.5% | $6392.13 |
Do You Have A House to Sell?
So, what if you have a house to sell and you have equity in your home. You could sell your home 6 months into the project or at any point and put whatever proceeds you want into the fidelity account. That money will go towards building the house and you will not many any interest payments on that money. You will only make payments on the amount of the loan you use.
This information has been provided to Circular Design Consultants from one of our preferred lenders, Tony Cash with Fidelity. If you have any questions about lot and land financing, do not hesitate to contact Tony.
