Q. The suburban home I own is free and clear of any lien or mortgage. I also have two acres of land in a nearby county that is also owned free and clear.
I would like to build a new home on the two acres, but do not have the cash to start construction. For personal reasons, I cannot sell my home and move into an apartment. Which is the best method for me to go - a bridge or gap loan, construction loan? What other options do I have?
A: We keep coming back to one of my favorite subjects, namely refinancing. Since several readers have raised similar inquiries, this topic deserves greater attention.
You say your home is free and clear of all mortgages. In our inflationary economy, and especially in the Washington area, single-family residences are going up in value at a fantastic rate each year. You've got a lot of money in your house, and you're not making use of it.
Let's assume that your house is worth $70,000. You can easily borrow up to $50,000, by obtaining a mortgage from a bank, savings and loan association, or a mortgage banker. The process of placing a new mortgage on your own home is generally referred to as a "refinance."
The biggest question to keep in mind is whether you are able to afford the new monthly payments. If, for example, you were to borrow $50,000 on your present house, at current market rates your monthly payment of principal and interest would be approximately $402. If this is too much for your budget, borrow less money, and discuss the monthly payments with the lending institution.
Keep in mind that under current tax law, the interest payments on this mortgage are fully tax deductible - and I can assure you that for the first few years, the bulk of the mortgage payments goes to interest.
Closing costs on such a refinancing should be fairly nominal, and the settlement attorney will be more than willing to deduct the legal fee from the proceeds, saving you the necessity of having to pay up front.
Using the refinance technique, you will have adequate funds to plan the construction of your new home. Like anything else, there will be a lot of preliminary costs, such as architects and legal fees, which you will need as you move forward with your plans.
While you are talking with the potential refinance lender, you might also discuss a construction loan at the same time. It may very well be that your income level will permit you to obtain a construction loan without having to refinance. After all, your land is valuable, and many lenders will take this into consideration in determining your assets. Discuss with the mortgage lender the possibility of obtaining a construction loan, which will become a permanent loan on the house when it is completed. Under this approach, the mortgage lender will be a participant with you in the building of your house. Periodic payments will be made to the builder, after the lender has inspected the job, and is satisfied that the work is going smoothly.
When the house has been completed, the construction loan will become a permanent (regular) mortgage - just as exists on any other home.
Finally, it may very well be that you can refinance your present home and at the same time obtain a construction loan for your new house. The major determining factor here will be your present income and our ability to pay two mortgages.
Benny L. Kass is a Washington attorney. Write him in care of The Washington Post's real estate section, 1150 15th St. NW, Washington D.C. 20071.