Cash Flow Planning for Custom-Built Homes in Cincinnati

Cash flow planning is a critical aspect of building a custom home. For homeowners committing to a significant financial investment, effective cash flow planning ensures that funds are available when needed, helps manage unexpected costs and provides a smooth financial experience throughout the process of planning for custom built homes.

Understanding Your Finances

Before embarking on the exciting journey of building your custom home, it’s essential to have a clear understanding of your financial situation. If your funds are tied up in your current home, consider options like bridge loans or home equity loans to access the necessary capital without waiting for your current home to sell. These financial tools can provide a cushion, helping you move forward confidently while keeping your cash flow intact. 

Consulting with a financial advisor or loan officer experienced in custom home construction can help you create a realistic plan and ensure a smooth path to your dream home.

Project Phasing and Budget Alignment

Building a custom home involves multiple phases, each with its own set of expenses. Chris Gorman Homes employs open-book contracting, giving clients transparency and the ability to plan cash flow based on actual costs. This approach is especially helpful for allocating funds accurately, as homeowners can see what each stage requires.

Phases like site preparation, foundation, framing, finishing and landscaping come with separate milestones and expenses, so having a clear cash flow plan aligned with these stages helps avoid cash shortages and ensures timely payments.

Handling Unexpected Costs

Even the best-planned projects can encounter unforeseen expenses. With cash flow planning, homeowners can prepare for these situations by setting aside contingency funds. 

For a luxury custom home in Cincinnati, adjustments in design, unexpected delays or changes in material prices can add up. Chris Gorman Homes’ custom approach allows clients flexibility in design, but that flexibility often requires budgetary foresight

Financing Arrangements

Cash flow planning ensures that loan draws are appropriately timed, covering costs without gaps. Since Chris Gorman Homes works in a high-end market segment, it is important to align loan disbursements with the needs of each phase to avoid out-of-pocket expenses.

Enhancing Financial Comfort and Predictability

The cash flow for custom homes in Cincinnati, especially for custom-built homes, can be complex. That’s why it’s beneficial to have an experienced builder by your side. By planning cash flow, homeowners maintain a level of predictability and comfort, making it easier to manage this investment without surprise financial strain.

This predictability allows clients to confidently make choices that enhance their home, whether opting for premium finishes, adding custom features or designing multi-generational layouts.

How Construction Loans Work

Most buyers build their dream home by having two loans: a construction loan and a mortgage or a combined construction-permanent loan. The advantage with the latter is one closing cost. Once the home is constructed, the loan is automatically rolled into a typical mortgage payment.

A construction loan is specifically designed to fund the costs of building a home. It differs from a traditional mortgage in structure, timeline and interest rates. 

Here’s a closer look at how construction loans work and the rates and fees homebuyers may encounter.

1. Application Process and Approval

Before receiving a construction loan, you will go through a detailed application process. Lenders require extensive documentation, including building plans, budget estimates and contracts with the builder. They use these documents to assess the feasibility of the project and the borrower’s creditworthiness.

2. Draw Schedule and Disbursements

Construction loans operate on a draw schedule. This means the loan funds are not disbursed as a lump sum but are released in stages, or “draws,” as construction progresses. 

For example, a draw schedule might look like this:

• Site preparation and foundation are covered by the initial draw.
• The second draw covers framing.
• The third draw covers roofing and exterior work.
• The final draw goes toward interior finishes.

Before each draw, the lender often requires an inspection to confirm that the previous stage is complete. Once verified, funds are disbursed directly to the builder.

3. Interest-Only Payments During Construction

While the home is being built, construction loans typically require interest-only payments. This means that you’re only paying interest on the disbursed amount, not the total loan amount, which can help ease monthly cash flow.

4. Conversion to a Permanent Mortgage

When construction is complete, most construction loans convert to a permanent mortgage. This process is often known as construction-to-permanent financing. Once the conversion happens, you start making full monthly payments, including principal and interest.

Construction loans usually have a shorter term, often 12 to 18 months. This means the loan must be paid off or converted into a traditional mortgage within that time frame.

Construction Loan Interest Rates and Fees

Construction loan interest rates are generally higher than those for traditional mortgages. This is because construction loans are riskier for lenders due to the complexity of the building process and potential delays. 

Here’s what to expect:

• Range of interest rates: Interest rates for construction loans vary, generally falling between 6% and 12%. The rate depends on the lender, the borrower’s credit score, loan amount and other market factors.
• Variable rates: Many construction loans have variable interest rates, which fluctuate based on a benchmark rate, such as the prime rate. This means your payments may vary during the loan term if interest rates change.

Construction loans involve several fees, which can add to the overall cost. 

Typical fees include:

• Origination fee: A fee paid to the lender for processing the loan, usually around 0.5% to 2% of the loan amount.
• Inspection fees: These cover the cost of each inspection conducted before disbursing draws, which can range from $100 to $300 per inspection.
• Title update fees: To ensure no new liens have been placed on the property, title companies often perform title updates before each draw, costing approximately $100 to $200 each time.
• Administrative fees: Some lenders charge additional fees to cover the administrative costs of managing the draw process.
• Interest reserve account (if applicable): Some lenders may require you to set aside funds to cover interest payments during construction, known as an “interest reserve.”

Additional considerations involving loans include: 

• Down payment requirements: Construction loans typically require a higher down payment, often between 20% and 25%.
• Closing costs: Construction loans can have higher closing costs than traditional mortgages due to the additional fees associated with inspections, title updates and administrative management of the loan.

Expected Total Costs

For example, on a $500,000 construction loan with a 7% interest rate over a 12-month term, the total interest-only payments could amount to approximately $35,000, depending on the draw schedule. 

Additional fees (origination, inspection, etc.) might add another $7,000 to $15,000, making it important to have cash on hand or financing to cover these costs.

Key Takeaways for Homebuyers

• Budget carefully: Beyond the principal loan amount, plan for the fees and interest costs that will accumulate during construction.
• Prepare for variable rates: Variable interest rates mean monthly payments can fluctuate. Consider rate-lock options if available.
• Understand draw schedules and inspections: Work with your builder to understand how draws and inspections might affect construction timelines.
• Transitioning to permanent financing: Discuss with the lender how the loan will convert to a mortgage and what that will entail for future payments and terms.

With a clear understanding of construction loans, you’ll be in a strong position to manage cash flow effectively during your custom home build and avoid surprises.

Cash flow planning provides stability, peace of mind and strategic alignment with the unique, custom process Chris Gorman Homes offers, enabling clients to enjoy the home-building journey with financial confidence. 

To get started on your path to a new custom-built home in Cincinnati, book a discovery call today with the team at Chris Gorman Homes.