Demystifying real estate: Do you pay a mortgage while a house is being built?

Building your dream home is an exciting journey. From choosing floor plans to picking out finishes, it’s a process full of anticipation. And in the Triangle, where there’s new construction at every turn, building a home may be one of the easiest ways to purchase today. But when it comes to financing the build, many first-time builders wonder: Do you start to pay a mortgage while the house is being built?

The short answer? Not exactly. Here’s what you should know about paying for a new build.

When building a home, you typically don’t take out a traditional mortgage while the house is being built. Instead, many homeowners use a construction loan. This type of loan is a short-term option that covers the costs of materials involved in the build. Next, keep in mind that there are numerous builders across the Triangle, and that you may take different approaches depending upon the home you’d like to build.

The first example is where you, as the buyer, take out a construction loan that you draw from to cover those initial costs. You’ll pay that loan during the building process. It’s typically much smaller than a mortgage. And thanks to these disbursements, you’ll pay for the major milestones in the construction process. Those milestones include laying the foundation, framing, or installing plumbing.

A second example is where a custom builder is building in a subdivision and has a loan out on the project. A builder may require the buyer to pay the interest on the amount drawn to construct a home. For example, if it took $100,000 of a $300,000 loan to build the home, you’ll pay interest on $100,000 — not $300,000.

Finally, some builders may only require a deposit, known as a builder deposit, which acts as earnest money. This is due when you sign a contract with the builder and will be applied to the final purchase price.

Since you don’t pay a mortgage while the house is being built, when the home is done, you will obtain a traditional mortgage. If you have a construction loan, that process will be a refinance of that loan into a permanent mortgage. A refinance means you won’t have to go through a separate closing process.

Another option is to apply for a new mortgage. If you have a construction loan, you will wrap that loan into a mortgage and obtain a lower rate. You will need to pay closing costs. And you may need to get approved for a loan again if your qualifying paperwork has expired. Talk to your lender to find out what’s necessary to complete the transaction.

If you start building a new home without selling the home you’re currently living in, you may have to juggle two financial responsibilities: your current mortgage and your construction loan payments. Factor this into your budget as you consider building.

However, if you sold your previous home and are renting while you build, the construction loan payments will replace your mortgage costs during the building process.

You won’t necessarily have to pay a mortgage while the house is being built. However, you may still need to be on top of the costs involved. Construction timelines can sometimes be unpredictable. That means delays could result in paying interest longer than expected. Or, if you’re waiting to sell your old home until your new home is complete, it may mean your payments are dragging on.

It’s smart to stay in close communication with your team. Work with your builder and lender to ensure the project stays on schedule — and on budget. And talk to your lender to work on locking in the right interest rate for your future mortgage while the house is being built. Small tips like these can help you save more down the road.

While you won’t start paying a traditional mortgage during the construction phase, be fully prepared to know what you’ll be paying both up-front and once the loan transitions to a standard mortgage. Work with a local lender like Towne Mortgage of the Carolinas or North State Bank. They know the builders and projects in the area and can help every step of the way.

Building a home is a big financial commitment. But understanding how construction loans work can help you plan wisely and enjoy turning your vision into reality.