First- please read HOW equity in your new home can be created.
There are several options for using the equity created in your new home.
1) Build a bigger home than you think you can afford! Details below.
2) Walk away with cash at closing! Details below.
3) Lower your monthly mortgage payment! Details below.
To understand these options, we've given you three scenarios below. For comparison sake, in EACH EXAMPLE you are approved for a $150,000 mortgage.
1) You can build a larger home than you would normally be able to afford. Example: You qualify for a $150,000 mortgage and you choose to use all of the mortgage money to complete the home. The home cost you a total of $150,000 to build (your maximum loan amount). But when the house is completed its market value is $177,500 or 15% higher than the construction cost (many times it is substantially higher). Once you move in, you're living in a $177,500 house... a house that you could not normally afford; but your mortgage payment for that house is based on $150,000.
2) You build a home that fits your needs and lifestyle, and cash in the extra equity at closing. Example: Rather than building larger than you need (like example #1 above), you build a home that fits your needs. You qualify for a $150,000 mortgage. The home that you choose to build costs $130,000 upon completion (approximately 15% less than your mortgage amount). At closing, you take the mortgage for your full pre-qualified amount, at $150,000. But because the home cost $130,000 to build you are given a check for $20,000 at closing. Remember- a bank will not give you a $150,000 mortgage for a home VALUED at $130,000. But the home (in this example) cost $130,000 to build, yet the appraised market VALUE is 15% higher or $150,000. Obviously, a bank will give you a $150,000 mortgage for a home that is WORTH $150,000. You walk away with $20,000 cash and own a home valued at $150,000.
Notice that in both examples (above) your monthly payment is based on a $150,000 loan (your mortgage amount).
3) You build a home that fits your needs and lifestyle, but take a smaller mortgage than what you qualified for; this gives you a smaller monthly mortgage payment. Example: You qualify for a $150,000 mortgage. The home you choose to build costs $130,000 upon completion (it's the SAME identical house in example #2). At closing, you take the mortgage for your total construction cost, which was $130,000. Your house (like example 2) is appraised for a market value of $150,000 or approximately 15% higher than your construction cost. Each month, your mortgage payment is based on a $130,000 mortgage, but you're living in a $150,000 house.
