If you want to make structural and design improvements to your home, you'll need the services of an architect. In general, a primary mortgage does not allow you to include architectural fees unless you refinance your home or take out a second mortgage. On the other hand, a construction loan allows you to include architectural and other related fees as part of the financing process when you build a home on a parcel of land.
Architectural Fees
A secondary mortgage, a home equity line of credit or a cash-out refinance are all ways you can borrow money against the equity in your home to make home improvements, which can include architectural fees. In such a case, the amount of money you borrow should be enough to cover the architect's fees and other costs, including design, construction, building materials, labor and required permits. On the other hand, if you own land and hire an architect to design a home to build on it, the architect's fees factor into the cost of the home from the outset, which is unlike a primary mortgage you take out on an existing home. This is an important distinction. Architectural fees and other costs form the basis for the loan amount on construction loans.
Construction Loans
A construction loan is different than a standard mortgage in that a financial institution lends money for either the rehabilitation of an existing property or for the construction of a new home on a piece of land. A construction lender considers all costs related to building the home, including the value of the land, to determine a loan amount. A construction loan includes soft and hard costs. Architectural fees, engineering fees and permit fees fall in the category of soft costs, while hard costs relate to the actual construction and building materials.
How It Works
Construction loans are interest-only loans over a short term, such as six months. You need a valid construction contract, which details the agreed-upon cost and estimated completion time for the project. You must also provide the lender with final plans and specifications for your home, such as architectural drawings and building materials you plan to use. The lender disburses funds into an account based on a draw schedule. You have the option of converting a construction loan into a standard mortgage after the work is completed. The interest rates on construction-to-permanent financing are higher than on a stand-alone construction loan.
Architectural Fees and Cost Basis
According to the IRS, your cost basis on a custom-built house is the total amount it cost to build the home including all labor and materials, contractor fees, architectural fees, permit fees, utility meter connection fees and legal fees. If you build the home yourself, your cost basis is how much you spent to build the home excluding the value of your own labor. So, if you happen to be the architect and designed your own home, the time it took you to draw the building plans may not be included in your cost basis. If you take out a mortgage, the government allows you to deduct the interest payments when you file taxes.