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Home Sweet Home
Easy as Pie 
2nd-May-2008 05:17 pm
It's always easy to get money to flow away from one.

Erik is aiming for CO (certificate of occupancy) by 3rd week May.  So I figured it was time to find out how we go about converting from our construction loan to a mortgage.  Because of the choices we made at the beginning, it turns out to be quite easy, indeed:  Two signatures (each) at a single meeting.  Done.

We took out a construction loan where we paid for the mortgage closing costs up front.  In effect, we contracted both the loan and the mortgage at the same time, with the second to kick in after the first is paid back (by the mortgage on the now-completed house.)  It's amazing how many different financial instruments are out there.  As my DHD friends know, it really does pay to shop around.

The advantage of this is, of course, that everything is essentially done.  We can even refinance -- actually it's not a refinance, since we aren't really changing anything.  The instrument was originally set up so we would convert the mortgage at whatever the rate is the day of conversion.  So, we'll go from a 5-yr ARM to a 30-yr fixed mortgage.  And, since rates are lower now than they were last year, we'll get a better rate out of it.  Because of our good credit rating, we qualified for a loan which also keeps the rate no higher than the initial one.  So, if rates go up in the interim, we simply remain where we are.

The advantage to the bank is that they get a lock on the customer -- it's so easy for the customer to stay that they run little risk of losing the mortgage.  They also can relax a bit on the reserves for this particular loan, since the chances are it will not be called in a year.

So, like I said, easy as pie, right?

Wellllll .... not so fast.  This is, after all our life we're talking about.  There has to be at least one complication.

Which is this:  CO does not equal CO.  Huh?

Well, there's the legal CO from the local government(s) which allows one to move into the house.  Doesn't meant the house is finished, but that electrical, plumbing, roof, etc. are at a quality to meet the local code.  This all hinges on a series of inspections, which Erik will be arranging for with the various authorities.  These will be taking place the next two weeks, if all goes according to plan.  With CO in hand, we are authorized to actually live at the new house.

For the bank, however, it has to be more than just live-in-able.  It has to be worth what the appraiser said it was worth in the beginning; i.e., that it will still act as collateral for the loan.  That measure is a higher bar than mere occupancy.  And, until we have this clearance, we can't lock in our rate and execute the mortgage.  And the mortgage rates, which are not related to the Prime rate as much as they are to LIBOR and 10-year Treasury Notes, are being stubbornly unstable but mostly high.  Not to mention that house prices are still falling, particularly in the one-state recession called Michigan the last 5 years or so.  sigh.

Still, we're sanguine.  We put a hefty down payment in the shape of the land (which we bought outright.)  We've also covered some of the expenses directly, so they don't count as part of the loaned money.  And, we didn't do the whole amount through the construction loan.  To keep the loans under jumbo rates, we took the above-normal rate amount in the form of a second mortgage (equity loan) on the current house.  So we should be ok if the worst happens and the house has lost value.  But we don't think that's what will happen, any way.  We think the biggest worry we'll have is the interest rates.

Long before we decided to build our house, the family mantra was "It never gets boring out, does it?"  Heh.
2nd-May-2008 10:42 pm (UTC)
I hope the recent rate cuts by the Fed keep the mortgage interest rate low for you.

And that your current house sells quickly, because it really sucks to pay two mortgages.
2nd-May-2008 10:59 pm (UTC)
Thanks for the good wishes, but I'm afraid "no" on both counts.

Mortgage rates don't follow Prime. There are a number of indices and stuff, but in a grossly simple form, it works like this: The safest investment (lowest risk) is 10-yr Treasury Notes. This is a measure of the lowest earning rate an investor (read: lender) can get, so any riskier investment has to provide a higher return (rate.)

So, mortgage lenders add a small amount to the T-Note rate for profit, and then a bit more spread for the risk. The higher the risk, the higher the spread.

Right now, due to the credit crisis, *everything* is high risk, even those borrowers with the best rating. So investors (mortgagees) are keeping the spread higher than they normally would, and those higher rates are stickier than they would normally be.

Reducing Prime is not really affecting this part of the market, right now.

As for house sale: well, we simply cannot put the house on the market as it is now. We have to remove our stuff, first, in order for any prospective buyer to even *see* the house. So, until we've completely moved, no selling our house.

I expect it will be next spring before we are ready. So far, I haven't found anyone with a clear enough crystal ball.
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