Construction loans are a special type of loans in which the proceeds are used to pay for the construction of the property. This type of loan can used to build your home from scratch or complete major remodeling of your home.

 

The terms and interest rate will depend on the scope of your project. In most construction loans, you pay interest only during the time of construction. All construction loans will have a limited term during which the project must be completed.

On Time Close

The Construction Loan and the permanent loan terms are determined at the beginning of the process. Sums of money will be disbursed from the loan principal periodically to the builder until completion of the project. During the construction phase, the borrower will make monthly interest payments based only on the outstanding balance in any given month (similar to a revolving account). Upon completion of the home, the loan will roll over into the permanent financing, and the borrower will make monthly payments in accordance with the terms of the note. The biggest advantage of a one-time close is the ability to lock in the interest rate and term of the permanent loan far into the future and the elimination of a second underwriting for the permanent loan. The draw back can be the limited terms available on the permanent financing as well as the permanent rate offered is typically slightly higher than the current rates but again this option make sense because the borrower is able to eliminate the risk of market movement during the time of construction.

How It Works

In its simplest form, a construction loan is a loan that you take out to build your own home or a major home remolding project. If you want to construct a building for business use or for rental purposes, you can also apply for a construction loan. The fundamental guideline that is followed when doing this type of loan is your ability to pay the loan back; primarily through the expected income and the ability to service the debt on a monthly basis. This is called cash-flow lending.  Even though during the time of construction you will make interest-only payments, you should qualify with the full projected monthly payment.  It is imperative that you learn all of your options before you start any type of construction.

Benefits

The primary benefit of the construction loan is that it enables you to build your own house or remodel your home through your builder of choice. In addition, because you only have to make the interest-only monthly payments during the construction phase you can afford to hold on to your current home while your new home is completed.

TIMING

You should start investigating construction loans as soon as you have decided to build your home.  Even if you are unsure of the cost of construction, you can meet us today to find out the right type of loan or whether building your own home is right for you.

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