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Types Of Construction Loans
“I’M CONSIDERING BUYING A PIECE OF
PROPERTY AND HAVING A NEW HOME BUILT. WHAT ARE MY OPTIONS WHEN IT COMES
TO FINANCING THE CONSTRUCTION? CAN I GET ONE LOAN FOR BOTH THE
CONSTRUCTION AND THE FUTURE MORTGAGE?”
You
have several different options in terms of loans, payment schedules,
locking in a rate, etc. Most lenders offer two basic types of loans for
new construction. The first is a sort of two loan system in which the
borrower has one short-term loan for the construction and then a
long-term loan for the actual mortgage. Usually, the borrow pays only
the interest on the construction loan and then gets a second loan to pay
off the construction loan. Although having two loans—and two
closings—can be a bit much to deal with, the borrower is able to use
two different lenders and possibly get a better deal on the second loan
if the rates drop. The second type of construction loan is called a
construction-to-permanent loan and is more of a two-in-one loan. Unlike
the first type, a construction-to-permanent loan has only one closing
(and only one set of closing costs) and often cost less overall.
Nowadays, construction-to-permanent loans are extremely popular due to
the flexibility of when a borrower can lock in a rate and the fact that
most lenders allow borrowers to not make payments during construction.
Since both types of construction loans can vary from lender to lender,
you should always consult with your mortgage banker.
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