When does the rate on construction loan come into effect?

elechim59 · Joined: 21 Mar 2006 Posts: 5 0.28 Dollars($)

On a construction loan, when does the interest rate that we purchased become effective? Is it upon the settlement? And is the Commitment letter binding.

Samantha · Posted: Tue Mar 21, 2006 11:02 am Post subject:

Hi Elechim,

Welcome to MortgageFit Forums.

These loans are usually variable rate loans. Here the borrower, the contractor and the lender establish a draw schedule based on stages of construction.

The interest is charged on the amount of money spent to date. The commitment letter can be a binding obligation of the lender and depends on how it is prepared.

God bless you.

For Mortgagefit,
Samantha

Guest 0.10 Dollars($)

In a construction a loan the interest is normally charged only for the duration of the construction period. After that the payments get converted into fully amortizing loan for the balance period.

Guest 0.10 Dollars($)

The rates can be fixed or adjustable with interest only payments during the construction period.

blue · Posted: Tue Mar 21, 2006 11:52 am Post subject:

Elechim,

Locking your interest rate in construction loans can be confusing. It's best to talk to your lender in the process to help you.

The interest rate in construction loans gets locked automatically at application or you may opt to float your rate.

A loan commitment letter is created to create a binding obligation for a lender and to make it effective, it needs to be properly drafted.

Bill · Posted: Tue Mar 21, 2006 6:18 pm Post subject: Construction Loan Rate & Buy Down

Elechim,

Generally speaking, a floating interest rate with interest only payments is due on the draw balance during the construction phase of the loan. The Lock-in Rate is effective upon that last draw and conversion of your loan to an End-Loan.

The choice to pay extended locking fees guaranteeing a rate or to float the rate should be yours based on a complete understanding of the risks and costs.

With any Construction-To-Permanent or One-Time Close Construction Loan you should ensure that your lender puts all variables in writing so that your decision is an informed one.

Best of Luck!

elechim59 · Joined: 21 Mar 2006 Posts: 5 0.28 Dollars($)

you are saying that the stipulations, interest rate during the construction phase and after the modification are binding for the lender? And if we close this loan, with the date of close printed at the top of the commitment letter, this too should show a binding contract. Correct? Our lender is trying to back out of the contract/commitment we signed July. The closing was Sept. 1, the expiratin date of the commitment letter was Sept. 6. We rolled the closing costs into the loan, and began the payments as of the 1st of Oct.. To me, that constitutes a binding contract. We are ready to modify this note from the construction phase, and the bank will not honor the interest rate previously set forth.

Guest 0.10 Dollars($)

Yeah,

Bill · Posted: Thu Mar 23, 2006 1:46 pm Post subject:

Elechim,

Your closing should have required you to sign many documents ... including a Mortgage and a Note. The terms that you agreed to within these documents are the binding contracts of delivery.

If you do not agree with what the lender is stating at this point in the transaction, you will need to review the closing documents for clarification. Any further dispute may require legal remedy by an attorney. Hopefully you had a reputable real estate attorney represent you at the closing ... and if not, you may want to interview one or more attorneys for possible review of your rights based on the signed closing documents.

Best of Luck!

elechim59 · Joined: 21 Mar 2006 Posts: 5 0.28 Dollars($)

and I would like to thank all of you for your insight. In a nut shell, the loan officer is stating that we only locked our by-down rate for 75 days. I am trying to get them to understand that we would not have done this, as we had a signed schedule estimating our house construction to be 90 days or better. They are also stating the the commitment letter is not a contract to hold our interest rate. And even though we closed 5 days before the commitment letter was to expire, and then began making the interest only payments during the construction phase that this did not guarantee the rate either. I might mention that this rate was not a floating rate. They have not been forthcomming with any paperwork signed by my husband stating that he wanted only a 75 day lock either. I am getting very tired of them dragging this out. The person directly in line to gain, should we be forced into a higher interest rate, is the very person who has caused this to come about in the first place. This smacks of "conflict of interest" to me. I might add that we had mentioned to the modication department our intention of paying down the mortgage amount by $35,000.00. And it was only after that, that the trouble started. The loan officer mentioned to me that if I had $35,000.00 to pay down on the principle, why didn't I just use some of that to buy down the rate again. Otherwise she said, we would have to pay at the going rate of 6.50 instead of the 5.37 we had bought down to back in June of 05. At the closing, this supposid 75 days had 5 days left before it ran out, and still she did not say anything to us about it, stating, "I supposed I should have mentioned it, but it slipped my mind." When I asked her why she wouldn't agree to honoring our original contract then, she said "because if I did, it would cost the bank too much money."
I know some of this might just sound too ridiculous to be true, however I can only wish it was all a lie. It is in fact a very real nightmare that we are being forced to fight though.

jameshogg · Posted: Thu Mar 23, 2006 3:23 pm Post subject:

Hi Elechim,

This is totally unprofessional on their part. There is nothing like "forgetting" in the industry if someone wants to live upto the expectation.

These sort of companies cause confusion to their customers and damage the reputation of the industry. Mad

I feel sorry for you.

Samantha · Posted: Thu Mar 23, 2006 3:36 pm Post subject:

Hi Elechim,

Welcome again.

It is indeed sad to know of your trouble. I would advice you to force them to come up with all the papers for you to verify.

If there is any dispute they must come up with all the papers. Take the help of an attorney and let him go through all those. But if the lock in period, as agreed, has crossed, then the rate will change and nothing can be done on it.

Buying down a rate is a possible option but you should get yourself convinced first that there are no other options left.

Don't lose heart. Come back to us with the proceedings. We shall always try to provide support to you.

At least others can learn from your sufferings.

God bless you.

For MortgageFit,
Samantha

Bill · Posted: Thu Mar 23, 2006 7:11 pm Post subject:

It sounds like you DO require legal remedy by an attorney.

As Samantha suggested, have the lender provide ALL documents they are using for their interpretation of your situation and have them reviewed and re-interpreted by your attorney. Again, if you did not have an attorney at the closing - you now need one and unfortunately the cost may be higher but well worth it if they can get you back to your original loan terms (if you are just now getting an attorney it is a little late, but never too late).

Our office just completed a 12 month One-Time Close Construction loan on a custom home with a $1M loan amount. The rate was locked at the time of funding as a 30 year fixed program with no buy-down fee. There were no surprises to the borrower during the draw or conversion periods. Please understand that your situation is unfortunate but not indicative of the industry as whole - reputable lenders will explain everything, provide documents that disclose all aspects in writing and exceed expectations.

Please let us all know how this situation ends-up. We're on your side as the customer.

Best of Luck!

Guest 0.10 Dollars($)

Thanks, Bill and Samnatha.

I came here looking for some similar questions. Thanks to you. Now I have some idea on such loan.

Bill I have also reviewed your company website and it has really impressed me. I liked the the way you have used some charts and figures.

Bill · Posted: Fri Mar 24, 2006 8:56 am Post subject:

Joosee,

Thank you for the kind comments. Please consider the FAQ and Borrower Q&A sections of our site as resource to future mortgage questions.

As you mentioned, it is of course very beneficial if your questions can be answered in a MortgageFit forum so that many others can simultaneously find answers to their own questions.

-Bill Clanton

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