Future Value Construction Loans

Normally I say things like 'no one asked for this but I'm posting it anyway' but this time, someone DID ask! I mentioned that we're using a future value construction loan to pay for the home renovations we're starting soon, and since it's relatively unheard of, I'm hopeful this post will give you some insight.

There's a very tiny, niche market of something called future value construction loans. It is not the same thing as a plain construction loan, which is what comes up on google even when you search for the future value part. There's almost no information on this on the internet because a regular person can't go into a bank and ask for it - you can only get it if you're working with a contractor or design company that is authorized to do so.

So, what is it? It's basically re-financing your house.

First, your contractor comes in and draws up the plans and the price quote. Then, an appraiser comes in and checks out the house in its current state and compares it to the plans the contractor made. Based on these plans, the appraiser gives the home a value based on what it will be worth when the construction is done.

The bank then issues a mortgage on your home for that future value amount, and you go through all the signing of the paperwork like you did when you bought the place. The difference between what you currently owe on your mortgage and that future value amount is what you have to spend on the construction (though you can pay out of pocket for additional costs if it doesn't cover the full amount).

It's easier to understand in numbers. The appraiser looked at the plans and decided our home would be worth $450,000 when all the work was done. We owe $300,000. Therefore, the bank will give us $150,000 for construction purposes. (I'm ball parking for ease, they often will only loan 80%, not the full amount.)

The bank pays the contractor directly as the work progresses because this amount is your new mortgage. While the work is being done, you only pay interest, no mortgage payments (you can if you want to of course). When the work is complete, you now have a $450,000 mortgage on your home.

Obviously, I recommend chucking every penny at the amount as soon as it's done, debt sucks. But doing it this way has two-fold benefits: (1) extra layer of protection because the bank is doing the funding and taking the liability risk, and the contractor has to stick to that price quote and (2) you don't need to go cash poor while under construction. It also makes it mentally easier because you're not paying loan payments all over the place, you just keep paying your mortgage like normal when it's all said and done.

Any questions?

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