Types of Home Construction Loans

Home Loan
Home Loan
Mar 29, 2018 · 2 min read

Building your home can come with a lot of peculiarities that you never envisioned. One of them is the construction loan you will require. Unless you are filthy rich, you will require a construction loan to pay for labor and materials as you build. The loan can also help you to buy the land as well. Construction loans are a bit more complex than other loans because, with the former, you are being borrowed money for a short while, for a house that hasn’t been erected. There are basically two types of construction loans to choose from.

Construction-To-Permanent Loans

This type of loan involves closing the loan once and reduces the amount you have to pay subsequently. While the construction is in progress, you will be required to pay only the interest on the outstanding balance. This interest rate can go up and down during the construction, according to the prime rate. So for example, if the Federal Reserve increases or decreases the interests of short-term rates while the house is being built, it means that the rate of your interest will change as well. After completion, your lender will then convert the construction loan into a permanent mortgage, which pretty much works like all other mortgages.

Stand-Alone Construction Loans

A stand-alone construction loan could be profitable if it makes room for smaller down payments. This can be a huge advantage for you if you already own a home but you do not have enough money at the moment for a down payment, but you are likely to after you sell your home. It allows you to live in your current home while the construction of your next home is underway.

However, this type of loan comes with some drawbacks. First of which is that you will have to pay for two closings and two sets of fees. The first being on the construction loan and the second on the permanent mortgage. Secondly, you will not be able to secure a maximum mortgage rate when you choose this type of loan. If for example, the rate of mortgage rises during the construction phase, you may have to pay higher interest on the permanent loan.

Whichever type of home construction loan you are seeking, a certified, leading home loan company, such as Southern Home Loans, can help you find and get the right loan for your home construction.

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