If you’re planning a construction project on an existing home or commercial property, or if you’re in the middle of an addition or renovation, a private second mortgage may be the best source of capital to fund the work involved.
There are a number of reasons for this.
First of all, if you don’t have enough available credit through, say, a home equity line of credit or unsecured lines of credit, then you’re going to need to get an incremental source of capital to pay for all the costs.
If you need to access the equity in your home to generate the capital required and you already have a first mortgage on the property, your options are going to be to refinance the first mortgage or get a second mortgage in place.
And typically a bank will not provide a construction loan in a second mortgage position, so a private second mortgage can be a very good option.
In terms of refinancing the first mortgage, you may not want to do that based on the interest rate you’re currently paying, and the prepayment penalties that may be incurred from refinancing.
Once again, a private second may be the best solution you have available to you.
There are also private lenders that have a focus in construction that have no issue going into a second position on your property so the availability of financing is going to be similar to what you would likely be able to find from institutional lenders in the local market.
A construction loan secured by a private 2nd will also allow you to borrow against the future value of the real estate instead of just the present value.
So if the “as complete” appraisal of your project provides for a higher market value for your property, the construction financing can allow for this and provide a larger amount of capital than a conventional second mortgage or home equity line that will only be based on the current or pre construction value of the property.
As mentioned above, money will be advanced in draws so it will be important to have a cash flow payment schedule that aligns with the draw schedule provided by the lender.
That being said, private construction loans tend to have very predictable draw administration processes in that you can expect to be provided a certain amount of money from the mortgage approval when a certain stage of work is completed.
This is not always the case with a bank or institutional construction loan where the draw advance process can encounter administrative delays as well as draw reductions if the lender’s third party appraiser determines that there is more work to complete that funds available after a full draw advance is made.
Once the work is complete, you will still need to repay the construction loan and that may be with a new institutional second if you still do not want to refinance your first mortgage.
Any new financing will be based on the updated market value of the property as well, which will reflect the value added through the construction process.
If you’d like to know more about construction financing via a second mortgage, please give me a call so we can discuss your situation together and go over the relevant options that are available to you.