Loan to Value and Your Home Equity
Loan to Value (LTV)
When you decide to build your own home and need to borrow funds to accomplish the task, you will need to obtain an interim loan. This loan will provide funds to pay sub-contractors and buy materials. When you are done building, the interim loan is changed to a permanent loan.
To put it simply: Let’s say you want to build a home and estimate that it will cost you $250,000 to build it. You go to the bank to get money to build the home. The bank will send an appraiser to appraise the land, the houses in the neighborhood, and your plans. The appraiser will then file a report to the bank advising that when your house is finished being built, it should appraise at a certain amount. Let’s say he appraises your house at $300,000. The bank will now loan you 90% of the appraised value to build the house. This is called LTV or 90% Loan to Value which would be $270,000. In this case the bank would set aside in a special account your $270,000. You take money out of this account as you need it to pay for materials and sub-contractors.
One thing to keep in mind is that interim loans are regulated by the federal government. All interim loans are the same, 1% above the prime interest rate on monies used. In other words, you may have up to $270,000 to build your home but you pay 1% above the prime interest rate only on the money you take out and interest starts at the time you take the money out of the account.
Let’s assume you finished building the house and it did cost $250,000. When you move in you’ll have $50,000 in equity immediately. Of course if you build it for less, you’ll have more equity. Always remember that if you had a builder build it, he would have charged you the $300,000 thereby making his profit and lowering your initial equity value. So it just makes sense to pay less to build the house yourself and get more equity faster.
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