A Guide to Construction Loans
Building your dream home is an exciting endeavor. From designing the floor plan, selecting exterior features and choosing a site location, every step of the home design process is in your control. In addition to designing your home, you’ll need to select a construction loan. There are different types of construction loans so it’s a good idea to understand the pros and cons of each. Here is an overview of the various loans.
Types of Building Loans
First, it’s helpful to know that building loans are different from traditional loans because they are offered at shorter term lengths and higher interest rates. Building loans are also handled differently than traditional loans because the bank pays the builder in installments instead of one final lump sum. Here are the three different types of building loans:
- Construction to permanent – with this type of loan, the bank pays the builder as the home is being built. Once the work is done, the total cost is converted to a mortgage.
- Construction only – if you have enough cash to pay off the total loan once your home is complete, this type of loan is a good choice.
- Renovation construction – if you’re fixing up a home, you may qualify for a renovation construction loan. The renovation costs are included at the end with the mortgage cost.
Pros of Construction Loans
Though you may have different financing options available, there are distinct benefits of a construction loan. First, you only have to pay interest during construction. This gives you time to save money. Another benefit of a building loan is that you’ll enjoy more flexible terms. A third benefit is added inspection. As your project moves along, there has to be an inspection in order for the bank to pay the builder their installment. This added scrutiny helps ensure that your project stays on time and on budget.
There are different types of building loans to fit your needs when building your dream home. Educate yourself about the different types of loans and work with a good builder and lender.
