The Truth About Construction Loans

The Truth About Construction Loans

People who decide to build their own homes instead of buying often get surprised when they learn they are getting a construction loan instead of a traditional mortgage. Construction loans are short terms loans with high interest, used to cover the cost of either rehabilitating or building your home. Unlike the conventional mortgage, which is often based on a fair market value of your home, construction loans are based on the projected market value when the work is completed. Discussed below are different types of construction loans that you are likely to get to finance your home.

Construction-to-Permanent Loans

If you have a definite construction plan and a timeline, you should consider this type of loan. In such cases, as the work is completed, the bank pays the builder. The cost rolls over to a traditional mortgage once the construction is done. Since interest rates are locked in closing, you do not have to worry about the rates increasing.

Construction-Only Loans

Just like the name, this type of construction loan is used to cover construction only. You can take this type of loan if you are sure that the amount from the sale of your current house will cover another build or you have enough cash to refinance the construction loan. If you want a mortgage to cover the cost, you have to search for the lender and be approved for the second time.

Renovation Construction Loans

If you are buying a fixer-upper home to rehab or renovate, then consider taking this loan. There are government programs available like the 203k loan for these kinds of projects. Any projected cost or renovations are wrapped up in the mortgage together with the purchase price.

How Construction Loans Work

Unlike traditional loans paid by a mortgage company in a lump sum, construction loans are paid in phases. For each phase completed, the bank pays the builder. The builder, therefore, needs to have enough cash upfront to cover costs.

Benefits of Construction Loans

When it comes to loan terms and guidelines, they are flexible compared to traditional loans.
During construction, you only pay the interests of the loan, hence manageable.
The added scrutiny from lenders provide structure, ensuring the project stays on schedule and budget

The Disadvantages

It has high qualifying standards.
The interest rates are high.
They are risky.

With the above information, you can be able to make an informed choice on construction loans. Reach out to DrawBridge Capital if you are looking for a loan on your next construction project.