Paying off lot before applying for construction loan

A lot would depend on your bank. Contact them just to see if you can refi the lot in the construction loan. One thing is for sure is that banks are looking for 20% down. So if you have that into the lot, plus cash, maybe they might.

If you do, that could drop your interst all together.

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Your first draft from construction will pay off your lot. A bank is not going to let you build on unsecured land

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This is how I thought it worked. I am wondering if I should just pay off most of the land to save some interest payments- and my first draft from the construction loan could be used for actual construction. I am also going to be switching banks which may make this more complicated.

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Paying off lot before applying for construction loan

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As mentioned, if you don't pay it off, it will be paid off at the closing of the construction loan by your construction lender. The decision driver for you should be whether you prefer to have the cash handy and pay the interest on the lot payoff through the construction loan until permanent financing.

I would add that you should keep excruciating detail of all out of pocket payments. I recently went through this and learned at the completion of construction that the bank would lend only the lesser of 70% loan to cost or 80% loan to value. I had paid a ton out of pocket and definitely enough to get me to 70% loan to cost. However, the bank basically put me through an audit on steroids to prove it. My cancelled checks and credit card statements weren't enough. They also wanted a contract or invoice for each vendor or laborer (proposals / bids with the exact amount confirmed by my check weren't enough). In many cases, I had to run my workers down and get them to sign contracts for work done and paid for long ago. In others, I had to call vendors and have them re-run all of my invoices. It was a royal paid in the arse.

In hindsight, I would have run everything through my construction account as they seemed far less concerned with those expenditures than my out of pocket ones.