When building a custom home, you will need a construction/permanent loan through a local bank or mortgage broker. You will settle on the construction loan before construction begins and the total construction amount is deposited into an escrow account that is drawn down as work progresses. You only pay interest on the money that is paid out and, when construction is complete, the loan converts to a mortgage without the expense of another settlement. It is recommended to borrow about 5% more than the estimated cost to build in case you decide to make changes or additions to the original scope of work.

For a home renovation, most people utilize the value of their home through a home equity loan. Generally, there are little, if any closing costs for this type of loan. As with any renovation construction, it is best to borrow 5-10% more than the estimated cost of the project or reduce the total estimated cost by 5-10% to allow for unexpected occurrences.

A simple rule to follow when qualifying for a bank loan is that your monthly mortgage payment, (including escrow for taxes and homeowner’s insurance) should not exceed 30% of your gross (before taxes) monthly income. Since mortgage interest and real estate taxes are deductible from your income before paying federal income tax, buying a new home or renovating an existing one is a great way to invest your money while you enjoy living in that investment.