Creative Log Home Financing

Financing should be among the first things you consider when planning to build or buy a log home. Assuming your credit score is acceptable and your debt-to-income ratio not excessive for the cost of the home you are considering, you have a number of ways you might finance.

Cash
Cash is nearly always good, if you have it. We say "nearly" because, if you have other more productive uses for your cash, it may be better to go ahead and get a mortgage on the home and use your cash elsewhere. For example, it might be better to pay off a large 19% credit card debt than to use your cash to avoid a 6% mortgage. Or if you have a hot mutual fund that is paying you 12%, it might be better to put your cash there, and take a 6% mortgage on your new home.

Conventional Mortgage
Interest rates are currently low on all home mortgages, which makes it very appealing to use other people's money to buy your new home. Conventional principal-plus-interest mortgages come in a variety of flavors.

The old standards are the 15- and 30-year fixed mortgages. There are also 10, 20, 25, or 40 year fixed mortgages. Some borrowers choose to self-adjust the length of their mortgage by paying additional principal as they go along.

There are also hybrid loans, which offer a few years of a fixed rate before switching over to an adjustable rate.

Then there are the adjustable mortgages, in which the rate can change every one, two, three, five, or ten years. There are usually caps such that the amount of change is limited. Watch out for adjustables that can include negative amortization, which can cost you extra money if interest rates go up when your payments are capped.

Rates are usually the best on shorter term fixed mortgages, on hybrids, and on adjustables.

Deciding which mortgage is best for you requires examining your current finances, possible future finances, cash flow requirements, length of time you play to stay in your house, and the stability of your lifestyle and job. There is no single mortgage solution that fits everyone.

Interest-Only Mortgage
This is the hot new home financing option. With an interest-only mortgage, you pay only the interest on the mortgage for a fixed term, usually five to ten years. After the end of that term, you either refinance, pay the balance in a lump sum, or start paying off the principal, in which case the payments can jump skyward.

The purpose of interest-only loans is reduction of early-on monthly costs. The larger the loan amount, the larger the monthly savings. These kinds of loans can be very attractive to those whose income is currently limited, but is expected to grow in the future. It's also attractive to those who are buying in an area of high home-value appreciation where the interest-only loan allows them to "buy" that future appreciation at the lowest possible cost.

Many people also like the fact that, with an interest-only mortgage, you have the option of paying down your principle by making extra payments. This is much like the same option with conventional mortgages, except that the minimum monthly payment is lower. When finances are tight, make the interest-only payment ; when finances are better, add an additional amount to your payment.

Moving Out of One Home Into Another
This is a common situation when you are trying to build or buy a log home, while still in another home. This assumes that you need some or all of the cash from the old house sale to help finance your new house.

The ideal arrangement would be one in which the closings for the old house and the new house take place on the same day. Although this can happen with careful planning, it often does not work out this way, for a variety of reasons.

It will be a case of selling the old house first, and buying the new house later — or of buying the new house before you have sold the old house.

Obviously, the better of these two cases is when you've sold the old house and have the money from that sale for use in your upcoming new house purchase. The problem then becomes more logistical than financial — where will you live in the meantime?

You may have a number of options: contractually setting your move-out date to coincide with your new-home move-in date, renting your old home from the new owner until your new home is built, renting an apartment, living with relatives, taking a long vacation, or living in your car (just kidding). Whatever you do, however, will probably involve two moves with possible storage costs added.

The second case is the one in which you must finance the purchase of new home before you've closed on your old home. Clearly, the easiest approach is to simply get a new mortgage for the new home, assuming you can qualify and that you don't need money from the old home as a prerequisite for buying the new home. You'll make two mortgage payments until the old house sells.

One hurdle with which you might have problems is qualifying for the new loan. If your debt-to-income ratio is already high with your old mortgage, adding a new mortgage might cause your ratio to exceed the limit for qualification for the new loan. See our Affordability Calculator for more details.

If you have this problem, you may have one or more of the following options:

Temporary New-Home Financing - To minimize your total monthly debt, go for the mortgage, fixed, adjustable, or interest-only only, that gives you the lowest possible monthly cost for you new home. Then, after your old home has sold, refinance the new home. Just make sure you look at the overall costs of this approach and that the terms of the temporary loan allow you to do this.

No-Ratio Mortgage - With a No-Ratio Mortgage, no income information is included with your application so there are no ratio calculations that might disqualify you. Interest rates are higher, a good credit score is required, the rates are fixed, and a 10% down payment is usually required.

Bridge Loan - A temporary short-term loan, backed by your old home equity, that is typically only available when there's a contract on your old home.

Home Equity Loan - Borrow against the existing equity in your old home to help with the purchase of your new home. Since this will be a temporary loan until your old house sells, make sure there are no early payoff penalties.

Property Equity - If you already own the property that you'll build your log home on, you can use your equity as a down payment on your new home mortgage.

Mortgage Tools

Fixed Mortgage Calculator - Use this calculator to determine you monthly payments for any length conventional fixed-payment home mortgage.

Interest-Only Mortgage Calculator - Use this calculator to determine your monthly payments for an interest-only mortgage.

Affordability Calculator - Use this calculator to determine if the home you want is too much for your finances.