At what point do you need to start paying your mortgage?

outlaw2005 · Joined: 25 Feb 2008 Posts: 5 Location: Cos Cob, CT

My brother in law just finished up building his house and got his OC papers. He had a construction loan and will roll that into a fixed 30 year mortgage. One thing he did say was that he didnt have to start paying his monthly payments until December this year because the mortgage doesn't actually kick in until then.

He took out the construction loan last October and says you get a year and a 2 month grace period before you have to start paying because the banks assume it takes a year to construct a house. I've never heard of anything like that. Anyone know what he is talking about?

liverichly · Joined: 10 Feb 2005 Posts: 198 Location: Orange County, CA

When you get a construction loan one option is to build in an interest reserve that will pay for the payments during the course of construction. Many of these loan programs do not force you to refinance until a specific date, so essentially he asked for 14 month construction period and that is how much interest was built into the loan. Whether he realizes it or not, payments are being made, just not directly out of his bank account. He could refinance the mortgage now and would be able to reduce the amount of principal owed because the interest reserve that was set aside would not be used and therefore would be paid back to the current lender. He should compare his interest rate now vs. what he could get as an interest rate on a refinance and then determine which is better to continue with - paying payments from the interest reserve or refinancing a lower principal balance at a new interest rate.