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he cautioned that I would have to wait at least 8 months to avoid a pre-payment penalty, even though there isn't technically supposed to be a pre-payment penalty on the loan.

My guess is the salesman will lose out on some money if you pre-pay it too quickly.

Read the documents. I'd bet that there is no penalty if the loan is paid off as part of selling the property. IS the loan against your current home? The one you'd be selling? If so, it would be getting paid off as part of selling the property. If it's a construction loan, and the loan is against the new property, then it'd be a different circumstance - it'd just be an early pre-payment.
Also, if it's against the new property, you can very easily make a very very large principal payment. Large enough that the remaining principal would be paid off in 3 months (or whatever is needed) - since normally for mortgages the interest is based on the current principal owed, it'd reduce the interest payments to a very very small amount. (again, read the documents to see how interest is calculated)

I do not know if a cash-out refi, a HEL, a HELOC, or a construction loan are going to be the cheapest/best options.
I know one of my local credit unions had a VERY attractive Home Equity Loan that was an ARM loan.
Sure, it adjusts after a few years - but in this case, you wouldn't care if it adjusts in 3 or 5 years, as you'll (very likely) have sold by then.
Rates aren't what they were like a year ago - so it might be cheaper to go with a HELOC if you think rates won't go up much during the ~1 year you plan to have it. (I don't think they will - and IIRC, HELOCs usually also have a cap on how much they can go up per month))

I'd definitely check with a few of the credit unions in your area and see what they can do.
I've found them to generally be better than banks I've dealt with. And there's usually quite a few of them that you could qualify to be a member of.
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