# Using equity in land as down payment on a construction loan...



## Mike in Oregon

Hi folks, I am new here and my wife and I are contemplating the following scenario and would appreciate your thoughts particularly if you have done something similar:

We have a nice home that we have a about 170 K in equity built up. We are contemplating taking some of the equity out and purchasing a piece of property outright so we own it free and clear. (We have out eyes on an 11 acre parcel near our town of Salem, Oregon).

We were thinking of working the land a bit, getting a well dug, septic tank in, and power to the site (currently it has none of this, but power is at the road to the site). We know through the county that it is possible to build a home on the property.

We are figuring about 50 K to do these three items--does this sound realistic? I understand wells vary in depth, etc and prices may vary, however does anyone have experience in expensive Western Oregon with getting a well drilled, septic tank put in and electric extended about 100 yards?

We are thinking of possibly staying in our current home for about 4 years (get my son through college) while working on the separate 11 acres (It's 15 minutes away from our home), planting fruit trees, putting up fencing, planning the best place to site our future home, etc.

We spoke with a mortgage broker that told us that if we owned a piece of property free and clear, we could use the value of the property towards a down payment on a construction loan in the future for our permanent home on the 11 acre property, once we sell our current place.

The property would be worth about 150 - 200 K and we would like to build a small efficient home for about 200 - 250 K.

Have any of you folks done this? If so, I would like to hear your experiences-good and bad.

I apologize for a long post and thanks in advance for your thoughts.

Mike


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## Teej

Can't help you out with prices on a well and septic because we live nowhere near Oregon but we did use the equity in our old home to purchase our current land. We refinanced instead of doing a home equity loan. This was back in the 90's and at that time there was enough difference in the interest rates to justify the additional cost of refinancing, I don't know about now. 

We went from 10 acres in the suburbs of Indianapolis to an 88 acre farm in southern Indiana and we have absolutely no regrets about the move. We love it here. We did a 2000 square foot double wide on a permanent foundation because by the time we were ready to move we had built up enough additional equity in our old house to pay cash for the home so we were mortgage free. No regrets there either, it's a well built home and 15 years later has remained virtually maintenance free. 

Of course, the move itself was not fun and hubby kept a close eye on the dealer when they were putting the house together and caught them trying to take a couple of shortcuts but those are the only things I can think of as bad experiences.


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## Mike in Oregon

Thanks for sharing your experience Teej.
That must have been a great feeling to be free of a mortgage.
We are also looking into a manufactured home option-that would allow us to move to the new property with less debt around our necks.
Mike


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## po boy

Yes, you can use the equity in the land as a down payment. The land does not have to be free and clear. If there is a balance owed, it will be refied into your new home loan.

Unless you sell your current home prior to building, you would have to include both mortgages in your debt ratio.


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## edcopp

It's common as a Big Mac. Enjoy the debt.


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## Pokletu

I hope it's okay to ask here, po boy, but are you a mortgage broker?

I'm planning on getting a loan against my retirement fund. How hard is that to do?


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## po boy

Pokletu said:


> I hope it's okay to ask here, po boy, but are you a mortgage broker?
> 
> I'm planning on getting a loan against my retirement fund. How hard is that to do?


 I was, retired 5 years ago.

You need to talk to the holder of your retirement fund about a loan. I t should be pretty simple.


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## Chuck R.

This what we did, we bought our 1st 40 acres, paid it off, then bought the back 40, paid it off. Then used the 80 as equity against the construction loan for the new house. That and cash put us at a 75% down. 

We built ICF with geothermal, one of the issues we faced, and our builder was up front about, is the issues with appraised value. The appraisal hinges on your local market and "like" sales. Depending on what's sold in your area lately, you're appraised value could come in lower than your actual construction costs. Especially if you're not doing the "norm" as we did with the ICF and GEO, literally no similar house were sold, so our appraisal was based on framed houses that are about 30% cheaper to build. This is where your land value can be a huge asset, because if there is a delta between construction costs and appraised value, you'll have to make up the difference.

In our case, the construction estimates were $465K (just house), with an appraised value of $350K for house and land. Basically $115K underwater before they broke ground. 

We've known several folks that ran into this issue and had to postpone their projects. 

Between owning the 80 acres outright and 175K down payment we managed to pull off what we wanted. The equity and down payment also allowed for a very favorable interest rate, and no escrow accounts. 

A lot of the building costs we took care of ourselves, rather than finance. Be advised, everything with new construction costs more than you think it will!

Chuck


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## TnAndy

Don't know what septic or well drilling costs are there, but here, 50k would do that with 25k left over.

Septic: $3,000-$5,000, depending on system size and complexity 

Power: $1,000/pole, wire included. Underground is more, don't know right off hand.

Both of the above you should be able to get a pretty accurate figure by contacting a couple of septic installers and your power company. The well is going to be the unknown, due to depth.....but you 'may' be able to get some idea from neighbors if you ask them how deep they had to go, and maybe talk to a local driller or two.

Well: 200-300' deep with pump installed would run 5-6,000.


Don't forget driveway grading and stone, IF you'd need that for access.


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## Chuck R.

To follow TnAndy's lead:

1. Our septic was $7300, (2.5 baths, 3 bedrooms, 3800 sq ft.)
2. Electric pole/transformer was free (due to all electric house) trenching and line $1100 for 125 yards.
3. No well, but we do own 1/2 mile of water line $7800 and the "benefit unit" (water meter) $4500. Then had to pay to extend waterline to the house. 

The kicker sometimes are the permits, septic, building and here "road access". For example a building permit is only $650 depending on house size. Road access was close to $5000. 

Chuck


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## Hoopjohn

In this area 
Septic. I paid $3500 for a conventional septic 10 years ago. Today a conventional septic runs $5 - $6K. A mound system runs $12 - $20K.

Water delivery system. Water well depth can change drastically. One neighbor is down 16' with a sand point and claims to have terrific water. Total cost $500. 
Other neighbor is down 88' with a drilled well. Total cost $5500.
My well came in at 265 feet. Total cost 8 years ago $9200. 

Power. They charge by the foot here. Usually, anything over 250 feet will require a transformer (extra cost of about $1300).
My house is approx. 220 feet from the pole. Underground electric cost was $360 8 years ago.


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## Sturedman

I must be on the wrong site lol. I have been under the impression, that my idea of homesteading was building a life of sustainability without cumbersome debt. I paid off my house here, and and am building a small house out on our 10 acres about 60 miles from where I live. I can't imagine want to "homestead" but needing to borrow money to build a $450,000 house to do it in? I am building a 960 sq ft home for about $20,000 by doing it myself. And saving the money over 3 years to get it done. Are you also going to be hiring a gardener and a staff to manage your homestead? lol.

Just kidding. I must be thinking this wrong somehow lol


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## Chuck R.

Sturedman said:


> I must be on the wrong site lol. I have been under the impression, that my idea of homesteading was building a life of sustainability without cumbersome debt. I paid off my house here, and and am building a small house out on our 10 acres about 60 miles from where I live. I can't imagine want to "homestead" but needing to borrow money to build a $450,000 house to do it in? I am building a 960 sq ft home for about $20,000 by doing it myself. And saving the money over 3 years to get it done. Are you also going to be hiring a gardener and a staff to manage your homestead? lol.
> 
> Just kidding. I must be thinking this wrong somehow lol


I guess everybodyâs ideas must be different, for instance my garden shed comes in at a little over 960 sq ft. but thatâs just where we keep the tools that our gardener uses. 

Just kiddingâ¦â¦

BTW, âsustainable debtâ is sort of relative to your income, isnât it?

Chuck


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## riggerjack

Western Oregon, are you down in the valley, or up in the hills?

We did this back in 2009. 3 bedroom septic cost 6400, well 165 feet- 16k, electric, over 7k and I did most of it.

Contact your electrical utility for their new service booklet. it'll tell you what they do and how much, stay away from moving high voltage, it is shockingly expensive.

If you are down in the valley, you will have silty soil, and you could google videos on drilling your own well. if you are on a hill, that will be less likely.

Septic costs are best contained by having a simple gravity system. That means low water table, draining soils, and placing everything downhill from home site. This is a simple plumbing system. There is no reason you can't do it yourself if you want to put in the time.

Depending on how hands on you are, and how much clearing work you need to do, you may want to think about buying your own backhoe, and doing everything yourself. Or not. 

Good luck, I'll try to answer what I can.


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## Pokletu

riggerjack said:


> Depending on how hands on you are, and how much clearing work you need to do, you may want to think about buying your own backhoe, and doing everything yourself. Or not.
> 
> Good luck, I'll try to answer what I can.


That's the route I'm going, Jack. Once the land's paid, I have in mind to put a tractor/loader/backhoe on the land; I think I can find one for under 11,000. A chainsaw and that, I hope, will get me started.


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