As I mentioned at the end of the first half of this post, it always surprises me that nobody asks us this question:
If the land is paid for and you’re getting a loan for the construction of the house, why exactly are you living in a bus?
There are a couple answers, of course.
The opportunity to be able to live an alternative lifestyle and see what it’s like and say that we did it is rather appealing. Each of the 3 Things We Don’t Miss About Living in a House contributes as well.
But the main, most practical reason that we are making this choice comes down to this: once we obtain the loan for the construction of the house, we have to start paying interest on it.
Here is how I understand the process (Disclaimer: I have absolutely no experience with this process yet and all of this may or may not be wildly inaccurate. Please do not make any major life decisions based on the information you are about to read):
A construction loan is usually structured in “draws” – apparently just handing over a huge chunk of money and letting you have at it is FROWNED UPON in most establishments. Go figure.
So. First, you submit all your plans and a complete bill of materials and every single expected cost down to the penny (there is probably lots more stuff you have to give them, like the rights to your firstborn child, etc.) and then the bank gives you juuuust enough money to cover your first set of expected expenses (this is the First Draw).
In our case, (I’m totally guessing here) the first draw will pay off the lien that Noah’s step-dad holds on the land, and will pay for things like our permits, soils and compaction reports, septic installation, possibly the foundation, temporary electricity, BMPs (I totally don’t remember what that stands for, but it’s important) and whatever else is needed.
You (or your general contractor) get all that stuff done (AND inspected) and prove to the bank that you did it by submitting all your invoices and receipts and what-have-you. Then you ask them really, really nicely for some MORE money (the Second Draw).
This cycle continues until the project is complete and you are eating breakfast at your new kitchen island/breakfast bar (which is so exciting because you’ve never HAD a kitchen island and/or breakfast bar! Eek!) and quietly drowning in debt.
All that sounds great, right(aside from the debt part)? The bank gives you all the money, the project goes swimmingly and then it’s done, you move in, you get a mortgage and you live HAPPILY EVER AFTER!
The only problem is that as soooon as you get even the first penny of that first bit of money you have to pay interest on the amount the bank has loaned you. Boo! Usually, the interest rate is much, much higher than a normal mortgage rate (the last time we were quoted it was around 10%) Boo (x 2)! The only (kind of) nice part is that it’s simple interest, as opposed to compound interest Yay!
What that will look like for us (completely and totally hypothetically because we’re still not at this stage yet) is that the bank will give us, say, $100,000 for our first draw (I have no idea if it will be that much, it’s just a nice even number). That means that that same month we will owe them (assuming 10% simple interest) $833 (for an explanation on how I reached that number, click here) and will continue to have to pay that every month until we receive the 2nd draw and then it will increase in relation to the total amount drawn. Blech.
There are additional costs as well: closing costs, possible change orders (God forbid) and just general unexpected expenses that I have been assured will occur without a doubt.
ALL THAT TO SAY: If we were paying rent monthly in addition to having to pay what equates to another rent payment (and will eventually become like three rent payments), we probably would have wound up being evicted and living somewhere much less nice than a bus.