When Do You Start Paying Mortgage on a New Build?

Purchasing a new construction home involves unique financial stages and payment obligations that differ from buying an existing property. Understanding these differences is important for managing expectations about when your mortgage payments will begin. The timeline for starting mortgage payments on a new build is influenced by how construction is financed and the transition to a long-term home loan. This article explores the typical financial arrangements from the initial building phase through to your first permanent mortgage payment.

Funding During Construction

Financing a new home build typically begins with a construction loan, which functions distinctly from a traditional mortgage. This type of loan is a short-term financial instrument, usually spanning six months to a year, specifically designed to cover the costs associated with constructing a property. Unlike a standard home loan, where the full amount is disbursed at closing, a construction loan is released incrementally as building milestones are achieved. The interest rate on these loans is frequently variable, often pegged to a benchmark such as the prime rate, leading to potential fluctuations in monthly payments.

Lenders disburse funds to the builder according to a draw schedule, linked to the completion of construction phases. For example, an initial draw might cover the lot and foundation, followed by draws for framing, roofing, and rough-ins for plumbing and electrical systems. Before each disbursement, the lender typically mandates an inspection by a third-party appraiser or construction monitor to verify work completion and quality. This systematic release of funds protects the lender’s investment and ensures the builder is paid only for completed work.

During construction, borrowers generally make interest-only payments on the funds drawn by the builder. This means the monthly payment obligation progressively increases as more capital is advanced. For instance, if a $400,000 construction loan has $150,000 drawn in the first two months, the borrower pays interest only on that $150,000, not the full loan amount. These interim payments are solely for accrued interest and do not reduce the principal balance.

Some home builders maintain relationships with preferred lenders or offer in-house financing solutions, streamlining the construction loan process. Opting for a builder’s affiliated lender might offer advantages, such as reduced closing costs or integrated communication between the builder and the financing entity. It is still prudent for prospective homeowners to compare terms, interest rates, and fees from multiple financial institutions, including the builder’s preferred lender, for the most competitive offer.

Prospective homeowners should budget for increasing interest-only payments and for contingencies during construction. Unexpected delays or material cost increases may extend the construction timeline, leading to more interest payments than anticipated. Understanding the draw schedule and associated payment increases is important for financial planning during this period.

Securing Permanent Financing

Once new home construction is complete, the financial focus shifts from the temporary construction loan to permanent, long-term financing. This transition marks the point where the borrower moves from interest-only payments on drawn funds to a traditional mortgage that includes both principal and interest. Completion triggers legal and financial steps to finalize homeownership. This phase ensures the property meets all regulatory standards and is ready for occupancy.

The Certificate of Occupancy (CO), issued by the local municipal building department, signals the home’s completion and readiness for habitation. The CO confirms the home complies with building codes and safety regulations. Lenders typically require a CO before converting a construction loan to a permanent mortgage or disbursing funds for a new permanent loan. Without this certificate, the home cannot be legally occupied, and final financing cannot be secured.

Before the final closing on the permanent loan, several inspections and a homeowner’s walkthrough are conducted. A final inspection by the lender’s appraiser confirms the home was built to plans and specifications, and its value supports the loan amount. Concurrently, the homeowner conducts a walkthrough (often called a “punch list” walk) to identify cosmetic issues, unfinished items, or necessary repairs. All identified deficiencies should be addressed by the builder before final closing to ensure the home meets buyer expectations.

A final appraisal is conducted by an independent appraiser to determine the completed home’s market value. This appraisal helps the permanent lender ensure the loan amount does not exceed the property’s value. The appraiser assesses the finished construction, material quality, and comparable sales in the area to determine a valuation. A satisfactory final appraisal is a condition for the permanent loan to proceed to closing.

The closing process for the permanent mortgage transfers ownership and finalizes long-term financing. At this stage, the borrower signs documents, including the promissory note and the mortgage or deed of trust. All closing costs, which can include loan origination fees, title insurance, and prepaid property taxes and homeowner’s insurance, are typically paid at this time. This process culminates in the recording of the deed and mortgage with the local county recorder’s office, establishing the homeowner’s legal interest in the property.

For borrowers with a construction-to-permanent loan, the closing process may be less complex as it involves modifying existing loan terms rather than originating a new loan. This type of loan streamlines financing by converting the initial construction loan into a traditional mortgage once the home is complete and the Certificate of Occupancy is issued. The conversion typically involves a rate lock and a final property review, often avoiding a second set of closing costs. This unified approach simplifies the transition to long-term homeownership.

Calculating Your First Payment Date

After closing on your permanent mortgage for a new build, understanding the timing of your first monthly payment is a key financial consideration. The period immediately following closing clarifies when principal and interest payments begin. Mortgage payments are typically due on the first day of the month, and this initial due date is directly influenced by your specific closing date.

At mortgage closing, you will pay “per diem” interest, which is interest accrued from your closing date to the end of that month. For example, if your closing occurs on August 15th, you will pay interest for the remaining 17 days of August upfront at the closing table. This upfront payment covers the partial month of occupancy, compensating the lender for funds disbursed from the moment you take ownership.

Due to per diem interest collected at closing, your first full mortgage payment (principal and interest) is typically not due until the first day of the second month following your closing. For instance, if you close your loan on August 15th, your first full mortgage payment is due on October 1st. This provides a “skipped” month without a mortgage payment, offering a brief grace period to organize finances post-closing.

Your first full mortgage payment includes principal and interest, calculated based on your loan amount, interest rate, and loan term. Additionally, a portion of your monthly payment typically includes property taxes and homeowner’s insurance premiums. These funds are collected and held in an escrow account by your lender, ensuring these expenses are paid on time and protecting your investment.

An escrow account is established at closing to streamline payment of annual property taxes and homeowner’s insurance. Your lender estimates the annual cost of these items and divides that sum by twelve, adding the prorated monthly amount to your regular mortgage payment. When tax bills or insurance premiums become due, the lender directly disburses funds from your accumulated escrow account.