One of the more frustrating and confusing tasks when financing the building of your custom home or the remodel of an existing home is finding the right lender. Do you go with a broker, or a credit union, or a small hometown bank, or a large banking institution? How do you know they will give you the best interest rate? These are some of the questions homeowners struggle with in choosing the right lender. It’s not a one size fits all situation. But we can offer you some advice to guide you in choosing a lender.
Let’s start by simply explaining the different types of loan you may need dependent on your situation.
If you are building a new custom home you will get a construction loan. While a conventional home loan usually lasts for 30 years at a fixed rate, a construction loan is written to last only the length it takes to build the home, and you may only pay the interest while you are building. After the home is built, you will need to get a conventional mortgage loan and pay off the construction loan.
If you are remodeling, you may get a home equity loan (also called a second mortgage), a home equity line of credit (revolving credit similar to a credit card), a cash-out refinance (refinancing for a larger amount by using the equity in your home), or some people opt to get a personal loan or just use a credit card.
Key Questions to Ask Lenders
- What is your interest rate?
- What fees do you charge (closing costs, etc)?
- Will I need PMI (Private Mortgage Insurance) with your product?
- How much do I need for a down payment with your products?
- How do I get in touch with you throughout the process? Choose a lender who is accessible, and won’t largely ignore you if you have questions.
Tips for Finding the Right Lender
Bottom Line Tip: Choose whoever will give you with the best rate and charge you the lowest fees.
- Work on improving your credit score, if necessary. Your credit score plays a large role in determining if you can get financing, and the rate you ultimately receive.
- Get lender recommendations from a wide range of individuals including someone who has recently acquired a mortgage, and your realtor, lawyer, accountant, financial advisor, or all of the above. The latter group of individuals mentioned are all dealing with mortgage lenders regularly.
- Get at least four loan estimates: one each from a local bank, a local mortgage broker, a credit union and an internet banker (e.g. Quicken Loans). There are lots of deals online you can investigate and research, but be careful to read the fine print.
- Compare lenders’ fees and interest rates. Different lenders charge different fees. Always read the fine print to understand what fees the lender is charging you. Remember interest rates vary daily. It’s best to get estimates all within one day.
- When dealing with a local lender, ask if they have any special in-house products. Some banks, especially local, will offer customers special types of loan (e.g. a loan with a lower down payment amount for lower income individuals).
- Lock it in! Once you’ve found your lender, ask them to lock in the rate if you want to guarantee you get the rate quoted.