What is a Construction Loan?
A construction loan is a home loan that is used to pay for the construction of a home. There are two types of constructions loans. The first type of construction loan is called a construction-to-permanent loan. It is used to pay for construction, and then once the home is built, it becomes a mortgage.
The second type of construction loan is a stand-alone construction loan. There is one loan for the construction of the home and then once the home is built, you get a mortgage to pay off the construction loan.
How Does It Work?
While the home is being built, you are only responsible for paying for the interest on the balance of the construction loan. This type of loan has a variable interest rate and that means it can change throughout the construction of the home.
Once the home is built, the construction loan will become a permanent mortgage just like a mortgage on any other home that was purchased outright. This type of loan can be a fixed or adjustable rate at 15 or 30 years. You’ll want to make sure you are choosing the right terms for this loan just as if you were considering purchasing a home off the market.
It is possible that a lender will allow you to set a mortgage rate once you begin constriction. You typically will need to pay a down payment of the amount you think the total loan will be but you can always discuss the specific details with the lender if you are unable to come up with a large down payment.
The reason a stand-alone construction loan can be a good idea is if you can’t make a large down payment. For example, if you are selling your current home, but want to build another. You might have a surplus of cash once you sell your home so you can use that to pay the construction loan once the home is built.
You should consider that if you do choose a stand-alone construction loan there will be two closing costs for each loan. You also are not able to set the rate on this type of loan so you could end up paying more than you expected in interest.
Can I Qualify?
A construction loan is not as easy to apply for as a standard mortgage because there is nothing to use as collateral. You will have to go through a rigorous process with the lender when it comes to the details of the home in order to qualify for a construction loan.
You will also need to be accountable for extra costs that come up along the way as the home is being built. Because there is no way to know the exact expected costs, you want to be sure you have some funds saved up to cover those expenses that pop up along the way.
Another major factor that you want to consider when choosing a construction loan is who is going to build your home. You’ll want to do lots of research before deciding on the builder just as if you were researching your dream home. They are going to be the person responsible for building your home so you’ll want to pick the right person for the job so that you aren’t over budget and the home meets your expectations.
Contact Us Today!
Choosing to construct a home is a major decision and there’s lots to consider. We want to make sure you have all the tools necessary to make the right choices. Please reach out to JZ Mortgage Services to discuss your options today!