Avoiding risks in construction financing

Avoid risks in construction financing

The dream of owning a home is fulfilled for most people only with an appropriate construction financing. This requires long-term planning and a realistic calculation. If the real estate credit is too scarce, substantial additional costs wait for the owner in the form of a financing gap. So that it does not come so far, we recommend the following tips to heed.

House financing – how big can the house be??

At the beginning of the financing of a real estate stands the complete collection of the own financial possibilities. Use existing income to determine what installments can be made in the future to pay off the real estate loan. Only regular income is included in the calculation.

In a second step, you have to add up the expenses that are necessary to cover your living expenses. This also includes expenses that are incurred only once a year. The expenses for monthly rent payments can be excluded, as these will not have to be paid in the future. After completion, the annual expenses are subtracted from the income and the result is divided by twelve. This amount represents the value that can be used to pay off the loan each month.

Calculate financing requirements

After determining the available budget, the real estate market can be explored. It is to be considered that with the purchase of a real estate some additional costs result, which are not contained in the purchase price. The so-called ancillary building costs include the broker's fee and the fee for the notary, which is mandatory.

In addition, the ancillary costs include the fee for the land register entry and the land transfer tax. Generally the additional costs strike with approximately 15% of the purchase price to be accounted for. It is advisable to calculate generously. Any subsequent financing is usually associated with a considerable additional burden.

Select favorable follow-up financing

The last years the interest rates for building projects were unbeatable favorable. Many builders have therefore agreed to a long fixed interest rate to benefit from low interest rates for as long as possible.

It is foreseeable that the interest burden will be less attractive in the future, as interest rates are currently being raised step by step. Those whose fixed interest rates are expiring will have to search for low-cost continued financing through portals such as www.baufi24.en/connection-financing/ quick-find.

Use equity capital

For a construction loan, an equity ratio is recommended. This keeps rates lower and shortens the term of the loan. In addition, lenders charge higher costs for full financing than is the case when own funds are brought in. Experts advise an equity share of 20 percent. At least the ancillary building costs should be covered with it. A reserve of two to three months' salary should be kept aside for unforeseen expenses.

Muscle mortgage – realistically evaluate own contributions in construction financing

In Germany, it is customary for builders to lend a hand themselves. This can reduce the loan volume and increase the equity ratio. The project is risky. If one's own craftsmanship is not sufficient to move the house construction forward quickly, delays occur that become very expensive.

The same applies to work done on one's own initiative, which was carried out poorly. If there are defects in the construction, a professional usually has to be called in later to fix them for expensive money. It is therefore advisable to make a meticulous assessment of one's own abilities.

What form of credit is best suited?

A distinction is made between a bank loan and a home savings loan. The former is agreed directly with the lender. Repayment installments include an interest portion and a principal portion. It is advisable to arrange unscheduled repayments in order to become debt-free more quickly.

In the case of a building society loan, the entire amount is first paid into a building savings contract before the builder is entitled to a loan. Those who do not yet have a building savings contract should in any case prefer the bank loan and use the amounts for a possible building savings loan directly in order to keep the loan amount small. Negative interest rates are usually much higher than interest on credit balances.

Call up subsidies

The federal and state governments provide subsidies in the form of grants, low-interest loans or guarantees. These relate primarily to renovations and measures that promote energy efficiency and age-appropriate living. Low-income families can also benefit.

Authoritative institutions include KfW (Kreditanstalt fur Wiederaufbau), BAFA (Bundesamt fur Wirtschaft und Ausfuhrkontrolle) and state development banks.

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