"Building a home can be a great experience," says Val Robinson, a mortgage loan originator with Fifth Third Bank. "I often say it may be easier to build the house of your dreams than to find it on the existing market. While building a home can take between six and nine months, so can house hunting. And once you buy an existing home, you generally have redecorating and updating to do."

An important first step when building a home is to find a good builder. "Get referrals, check workmanship and see if you can communicate comfortably with the builder and any office employees," Robinson says. She adds that Fifth Third Bank requires its customers to work only with licensed contractors.

Construction loans -- demystified
For people building a home, Fifth Third Bank offers what is known as "construction-perm" loans. These loans involve just one closing that's done at the beginning of the process. In the past, people had two closings -- one at the beginning and one at the end. "Construction-perm loans are more convenient, plus they save on closing fees," Robinson says.

"To get started, people come to us with information from their builder," she continues. "This includes detailed and accurate building plans; the builder's spec list; the builder's cost breakdown on such items as windows, cabinets and fixtures; a contract from the builder; and a copy of the deed that shows who owns the lot."

An appraisal is made based on the plans and specs. "Once we know what the house will appraise for, we close the loan -- before any construction begins," Robinson explains. "Sometimes a loan for the lot is also rolled into the mortgage."

People have two options for locking in on an interest rate: They can lock in at the time of the application, or they can choose a "float-down" option. With that, they hold off on locking in on a rate up to 30 days before construction is complete. "If interest rates go down during this time, they can lock in at that lower rate," Robinson explains.

Once the loan is closed, a builder requests a draw on the loan when certain aspects of construction are complete. For example, once the slab is poured, the builder will come to the bank and request a draw. "That's how he gets paid," Robinson explains. A builder makes about five draws during the construction process.

During construction, the mortgage holder pays interest only on the draws. For example, if the first draw is for $30,000 and the interest rate is 6.25 percent, the mortgage holder pays only $156. If another draw of $30,000 is made the second month, the mortgage holder pays interest on $60,000, which comes to $312. During this phase, the homeowner must pay for homeowners insurance.

Evolving into a permanent mortgage
Once construction is complete and a final inspection is performed, the loan automatically rolls into a permanent mortgage that includes principal, interest, property taxes and insurance. Most people opt for a 30-year, fixed-rate mortgage, although some may choose a 15- or 20-year mortgage or one with an adjustable rate.

For more advice on construction-perm mortgages, contact Fifth Third at (866) 475-4201 or visit the Fifth Third website.