I'm having a difficult time getting unbiased advice on a construction loan advice. Every mortgage broker/banker tries to sell me their own product... even friends!
We bought a house which we are going to demo and build a new house. We are debating between a 10/1 ARM and a 30 year fixed (both are one time close, interest only during the construction period).
A little background... We owe $420k on our current house. We are 2 years into a 15 year fixed mortgage at 3.125%. We bought a 2nd house for $319k ($142k cash + $177k from a HELOC). Our plan is to demolish the house, build a new house, move into the new house, and then sell our current house. We expect demolition and construction to cost ~$800k. We expect our current house to sell for ~$750k. When we sell our current house we will pay off the HELOC and a portion of the construction loan leaving a loan of +/-$650k.
We have been offered 2 very different loan products for the construction. Both are one time close, interest only during construction phase.
1) 10/1 ARM; 4.50%; $8k in closing costs
2) 30 yr fixed; 5.125%; $12k in closing costs
We plan on being in the house for many years. It would be great if we didn't have to refinance, especially with interest rates likely to rise. On the other hand, construction loans are more expensive than a traditional mortgage so we aren't opposed to refinancing to a traditional 15 or 30 yr mortgage once our house is done.
Questions I'm planning on asking... cost for re-fi within the bank? Pre-payment penalties?
Any suggestions? Any other q's I should be asking? Thank you!
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