I’m not an expert but I’m pretty sure you could also roll the other two into your current megacorp 401k for simplicity of management, but again only if you are satisfied with the investment options available to you currently. This would be as opposed to rolling into say a fidelity ira that you could invest in anything under the sun, but comes with the backdoor Roth downside mentioned above.
What up all! I’m hoping to get some insight in a bit decision from the smart folks here.
My wife and I are planning on working with a local home builder for our first house. They already own the land and are currently working on specs / permits to break ground in May. The builder does fantastic work and builds 15 houses a year. The question comes in around the financing choices. I can either take the construction loan in my responsibility prior to start of construction to lock in rates or the builder will assume responsibility of it and let me purchase the house via a traditional mortgage at the end. The price will be a little higher on the latter due to interest payments being passed on to me.
I’m having a really hard time deciding which is the better option. The down payment would be the same for both, but I would need the funds about 6 months sooner if I assume the construction loan. I could probably put another $30k down if I just bought it outright. It also seems like less of a hassle to just let them handle it. I would lose some control and raise the risk of getting screwed, but that doesn’t seem likely. I also don’t see interest rates rising over the next 7-9 months.
Anyone have experience or opinions on this?
Appreciate it
Non expert opinion, if you can afford it just take on the construction loan. I await anyone pointing out why this is wrong.
I think the smart move is to wait to originate the mortgage as long as humanly possible. I wouldn’t go the construction loan route here. I am also looking forward to hearing why I’m wrong.
I just think the chances interest rates head downward between now and the home being completed are >0 and even a 25bp drop is a huge deal.
Like I said in UP, check out the property tax situation. They may tax the land purchase price instead of the overall value of the property after you improve it.
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Shouldn’t be too hard to refinance if rates do go down, no?
I think the market is overly bullish on interest rates dropping, and I still think they’re way more likely to be lower than higher in 7-9 months. Would construction loan rates be the same interest rates as mortgage loans of the same magnitude? IE it’s just a bet on the rates for each being lower in 7-9 months, one isn’t lower than the other inherently?
As a point of reference, FedWatch markets currently price the odds of rates after the Sept 18 meeting at:
Current 5.3%
-25 bips 27.3%
-50 bips 42.8%
-75 bips 22.7%
-100 bips 2%
Personally I think there’s a very small chance the rates are higher (low single digits), a higher chance they’re flat (maybe teens?), and the others a tad lower to account for that.
How much is the gap between the prices if you lock in the construction loan now versus buying it outright later? I assume the second price would lock now? Or could they screw you on the end? With this info, it turns into a fairly simple math problem I think (see below).
I also think having them on the hook until the work is done gives you a lot more leverage if they mess something up, which seems important on something of this magnitude - no matter how good their reputation.
So my thought, without seeing the numbers to crunch, is put the down payment you have now in $BIL (reinvest dividends), which yields around 5% and should offset at least a chunk of the interest you’re going to get passed on to you from those construction loans. Whatever the gap is between your current rent and the mortgage payment, put that in there each month too.
That makes sense to check too.
They usually say to only do it if the rate has dropped 1% or more. You have to pay closing costs again, so that could be several thousand dollars. Here are some numbers… No clue how much this house costs, so, just ballparking.
$500K home, $100K down, including property taxes and homeowners insurance,
7.25% $3,396/mo
6.75% $3,261/mo
6.5% $3,195/mo
6.25% $3,130/mo
5% $2,814
If they lock a rate now, it’s presumably going to be north of 7.25%. If the rate is at 6.25% a year from now but still moving down, it gets into tricky territory on when to pull the trigger on the refinance. Like, I would assume mortgage rates eventually trend back below 5% (they stayed below that for the previous 11 years).
It would be pretty annoying to pay like $5K in closing costs to cut the payment from 3,400 to 3,100, then go back in a year and pay it again to get down to $2,800.
Taking a wild guess here that the purchase price goes up by maybe $25K if they wait.
$525K home, $105K down (invested the down payment), including property taxes and homeowners.
7.25% 3,565
7% 3,494
6.75% 3,424
6.5% 3,355
6.25% 3,286
5% 2,955
So you need it to drop more than 50 bips to offset the higher price if my wild guess was accurate.
Using the FedWatch odds…
5.3% chance of paying $3,565
27.3% chance of $3,494
42.8% of $3,424
22.7% of $3,355
2% of $3,286
= $3,436 EV on the monthly payment
So it’s like $40/mo higher, but you also save that first round of closing costs to refi and can just refi once when it gets down to the 5% range. Plus if you save the gap between rent/mortgage and put that into the down payment, you should come out slightly ahead… and best of all you keep more leverage if there are any issues with construction.
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I agree rates are more likely to come down. Refinancing is not free.
If they property taxes are paid in arrears, then if you close in 2025 you will pay on the lot (as said varies by state). You may be able to avoid a year of full freight taxes. Consult someone with real knowledge-I did get this advantage by dumb luck once.
Your world can change. Hopefully not. But I don’t see much downside to waiting.
Well that’s gonna drive a lot of people out of the realtor business. Will be interesting to see what replaces the model.
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There is little to no reason for agents to exist at all. Now do title insurance.
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There is definitely no reason for buyer’s agents. Probably still some market for flat fee seller’s agents who get your house ready to sell, post it on the MLS service for you, prepare the paperwork, etc.
I’ve always found the agents to be helpful, but the cost…
That said, with fee per house dropping 50-75% or more? a completely new model comes in where you get more of an employee of a large corporation. The individual incentive disappears and there may be some apathy.
Idk, the seller should pay something like 2% to an agent (or a flat fee?) and if the buyer works with a broker the buyer should just play a flat fee ($500??)
My brother became a car salesman after the era of big commissions. It was brutal. On the plus side, when they hired a 20 something to run their sales floor, he fired all the olds to hire his buddies. My brother and a couple of others got an age discrimination payout.
Percentage based commissions are just displaced from reality. You could buy the exact same house in my community for around $300,000 that would cost close to a million elsewhere. Is the broker selling the million dollar home doing that much more work to sell it? Is his/her cost of living so much higher to justify the difference in gross?
It should be flat fees based on a theoretical hourly rate for the broker, or it should be an actual hourly rate, contingent on sale of the house, deducted from the proceeds, disclosed up front. Really great broker? Great they can charge a higher hourly rate.
If the agent lives in a house then yes there cost of living is that much higher. DUCY?
Always been bizarre to me that the agents selling the house are making like 20x the lawyers. Like I’m sure the legal stuff is super routine but so is taking some pictures and posting them online and unlocking the door
Their cost of living delta is nowhere near proportional to the relative housing markets of the different jurisdictions. In fact, if they are living in a house they own, their cost of living delta is actually less than that of a renter. DUCY?
So assuming this means average commission goes from around 6% to around 2%. What sort of impact will this have short to midterm? At first I would think means sellers just get to keep more money, do we really think this would cause an appreciable increase in the amount of people now wanting to sell in short term?
It’s gonna take a while to play out, I think. LOL realtors aren’t just going to voluntarily change, they’ll try anything they can to hold the cartel together.
The only required change, I think, is listings won’t say how much the buyers agent commission is. So if I’m reading correctly and that’s true, lol realtors will still try scare sellers into paying 3% (6% total).
The change that would actually end all this bullshit is blowing up the MLS monopoly.
I’ve been reading some of r/realtors and other stuff and I’m trying to think of what opportunities there are for a new website/app (which is what I do) based off of this change and IDK. Any thoughts?