There’s no one-size-fits-all rule on whether or not you should pay off land before building on it. It fully depends on your loan terms, your budget for building, and your long-term financial goals.
Unless your final payment date is fast approaching, you don’t have to pay off land before breaking ground. If you also need a construction loan, you can refinance the land loan so you only have one payment to worry about. You can also purchase land with a construction loan, saving you from needing a specific land loan in the first place. Not paying off land loans only affects construction if you miss payments and foreclosure starts. Otherwise, paying off the land before building or not doesn’t matter for our plans.
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Do You Have to Pay Off Land Before Building on It?
If you get a lot loan to purchase land, you probably don’t have to pay it off before you start building. Read your loan terms carefully to make sure.
You will have to keep making loan payments during construction. Lot loans may require bigger down payments than traditional mortgages, too. Some land loans can last almost as long as mortgages, around 10 to 20 years, though they are often shorter.
Land loans sometimes contain big balloon payments at the end of the loan term but not before the building starts.
Can You Finance Land and Construction Simultaneously?
You can finance land purchases and construction simultaneously with a construction-to-permanent loan. This loan type funds your build and turns into a traditional mortgage when construction is done. You can lock in mortgage interest rates when you get this type of loan.
You can also refinance a land loan with a new construction loan, using it to pay off whatever’s left on the lot loan balance. Then, you only have one interest rate and payment to worry about.
If you haven’t purchased land yet, you can approach a lender with the lot you have in mind and plans for the build. Construction loans require sizeable down payments, even if home buyers already have land financing.
Should You Get a Land Loan?
Getting a land loan rather than purchasing the lot in cash can help you save for construction. Particularly if you want a custom home with lots of amenities, having a land loan can ease financial stress.
Only getting a land loan might limit your spending, however. If you get a construction loan to purchase the lot and finance the build, you can address two needs at once.
Pros and Cons of Paying Off Land Before Building on It
Paying off the land before you build lets you save on the interest that would have otherwise accrued. Furthermore, owning the land outright reduces the risk to lenders when giving construction loans, so you might get better terms.
That said, making big land payments close to construction might restrict your budget. We can factor many expenses into your target budget, including any land loan or construction loan payments.
Also, paying off the land before building means one less lender standing over your shoulder waiting to get paid. If you can’t pay off the land but the loan term’s almost over, you can refinance.
Your long-term financial goals affect whether or not you pay off the land before building on it, too, not just your budget for the new home build.
When Should You Get a Land or Construction Loan?
If the perfect lot comes on the market, you can get it with a land loan, even if you don’t have house plans drawn up.
If you want to purchase the land with a construction loan, you will need home plans ready. We can sit down with you to understand your vision and show you our portfolio of base plans. These plans are pre-engineered and architecturally sound (which lenders will want to see), though customers can modify them as needed.
You can get a land loan before having detailed specifications and building costs, but not before getting a construction loan. We can break down building costs for you so you can give that information to your lender for approval.
Lenders generally require better credit scores and bigger down payments for land and construction loans compared to traditional mortgages. Find a lender you trust, and don’t rush into signing loan terms until you’ve read and understood them.
Improving Land Before Building on It
While you don’t have to pay off the land before building on it, you do need to make land improvements.
Leveling and Fortifying Ground
During pre-construction, we can level the ground. We can also create draining solutions and test the soil. We may bring in more soil to fortify it and make sure your house’s foundation is stable.
Clearing Trees
We can also clear any trees or shrubbery that’s in the way. We’ll visit the site with you before we do, making sure we keep any big trees or plants you want.
Adding Utilities
Unimproved land needs water and sewer lines added. We’ll get the permits to install electricity and gas and create road or driveway access points.
Will Not Paying Off Land Before Building Affect Construction?
As long as you keep making land loan payments during construction, not yet paying off the entire loan won’t affect our progress.
The personal financial decision of when to pay off a land loan is yours to make. We can still get zoning approval and whatever permits we need to break ground.
Stopping payments risks foreclosure before your home is finished being built. Refinancing land loans or getting a construction-to-permanent loan from the get-go may simplify your payments and avoid this.
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Visit our page here to learn more about the custom home building process in South Carolina by Blythe Custom Homes.
