Some people prefer building their homes instead of buying ready ones. That means you are looking at a different approach from the traditional mortgage. The following are all you need to know about construction loans so that you can make an informed decision as you embark on building your home.
Construction loans have comparatively higher interest and are short term in nature.
The loans are used to cover the construction costs of the building or for rehabilitation or renovation of the home. Utilizing construction loans is different from the conventional home where, in most cases, it is based on the market value as well as the condition of the house. The construction loans are usually based on the predicted value of the home when it will be complete. Construction loans come in three types, namely construction-to-permanent loans, construction-only homes, and renovation construction loans.
Construction-to-permanent loans are suitable for people who have definite and ready construction timelines and plans. In this type of loans, the bank releases the money to the builder as the construction work is being handled. The cost is then converted to mortgage during closing. The construction-to-permanent construction loans allow the bank to lock interest rates during the closing, which makes it ready for regular payments.
Construction-only loans-The construction-only loans are usually paid off once the construction is complete. This is a preferable choice if you have a large amount of money to operate with or if you have confidence the proceeds from the sale of the of your existing house cab cover the cost of constructing another home. In this case, you may require a mortgage to cover the construction cost. You may be forced to look for the lender yourself and should be approved for the second time.
Renovation Construction Loans-This kind of loan is used for getting a fixer-upper. There are government programs that are available to fund these type of loans. The projected cost of renovations that you plan on doing on the home is wrapped up and included in the mortgage, together with the buying price.
Unlike the construction of the traditional loans which are paid in one lump-sum to cover the cost of the home, construction loans are released in installments. The lender pays the builder every time a construction phase is completed. The overall cost of the construction is then transferred to you when the entire construction project is completed.
The installments are referred to as draws, and each draw reimburses you as the builder the cost of covering a given phase in the construction process. If you have enough money to complete a given phase upfront, then the bank will inspect to confirm the estimated cost of that phase before each draw is made. The inspection is also necessary to see how the builder is progressing on the agreed and projected timeline.
Before you apply for a loan, do enough research so that you get the most suitable loan product and from a reputable lender. Compare the interest rates of potential lenders and choose one that is reliable and with affordable interest rates.