Let ‘s talk rates. I’m not afraid to talk specific numbers. Heck…. My life is specific numbers. The easiest way to define a rate is what is referred as “A -money “. What “A-money” means is: 1- You can document your income to qualify for your mortgage. 2- You have sufficient reserves in the bank to be a good risk. And finally.3- You have good credit. (usually a 720 fico score or higher. (see section on Fico scoring).

If this is the case, what should you be paying on funds as disbursed through a construction project? Prime…Prime +1%? Banks will have you believe that Prime +1% is a good deal. They will use lines like “you’re a prime borrower but the bank needs to make money”. I don’t own a bank. I don’t care if the bank makes money. I care that my clients save money. Prime +1 = 6% today! The best rate available on funds as disbursed for “A-Money” construction to perm loans today is ….get this…               * 4.0%! *

What that means is you pay 2% less than an interim loan at the bank and you don’t pay fees again to refinance at the end of construction.

Let’s do the math. Loan amount =$400,000.00 2% savings in interest rate = 8,000.00. *disbursement factor of .65 means as savings of $5,200.00!  *a factor is use because all the funds are not disbursed on day one. (apr = 4.47%)

What can you put in that house with an extra $5200.00 when you are done?

The bottom line is: if you are a “Prime Borrower” you do not pay “Prime”. What is the Prime Rate anyway? It is often defined as: “The interest rate charged by banks to their most creditworthy customers (usually the most prominent and stable business customers)”. I’ve heard Loan Officers say “prime would be the rate at which we would lend to IBM. Do you think you should get a better rate than IBM?” The answer is an alarming YES! The loan to IBM does not have my house on it. The loan to IBM is not a mortgage backed security guaranteed by the federal government and sellable in the secondary market. The answer is: “If you want a loan on the perfect borrower on the perfect piece of real estate (an owner occupied home) you should be willing to do a lot better than prime”.

The point: When you go into a bank to get a loan, you are not getting it from your friend and neighbor who works in that branch. He gets paid to smile and usually means well. The terms of that loan however are being set by a board with one responsibility: To take money from you and give it to their shareholders. That is their legal obligation. Anything short or a plan to charge you as much as you are willing to pay would be a breach of that duty.

It is your responsibility to yourself and your family to shop around. Call several lenders. When you are comfortable with a few then…. Apply to three. Yes, I said that. Apply to three. (it does not hurt your fico score if you do it within a 2 week period). Once you get complete numbers and funding conditions from 3, then sit down and decide. If at that point, you get the same feeling and numbers from the smiling friend at you own bank, go with them. If it is even close, give them the benefit of the doubt and go with them. It’s been my overwhelming experience that you won’t.

Paul H. Laak