I'm just not understanding this....

6 Replies

Thank you all for your previous answers, maybe I need to ask the question a different way to help me understand?  

I own a parcel of land = $150,000

Construction costs will be $350,000 for a single family home

When this construction loan is converted to a permanent mortgage, how does the bank determine my loan balance?   I plan on using the land as my downpayment.    

Does the permanent mortgage pay off the construction loan and then my perm loan is based off of the appraised value (lot + improvements) or is it based off of construction costs + lot?

Or now that construction is complete and I own the land, do I just refi to get a better interest rate on the construction loan?  

I cannot wrap my head around this.....

Thanks!

Thank you @Charlie Fitzgerald

So, "Your loan balance will be the amount of money paid out by the lender to the contractor that built the house ($350,000). Your down payment will be any costs you paid out of pocket (soft costs) and the value of the land ($150,000) (provided you owned it free an clear.)

For simplicity sake, let's not factor in soft costs right now...

My loan balance would be $200,000 in this example?