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What is a Construction Loan? When should I apply for a construction loan?
By Susan Wellish
Location is a top factor in the value for a home. You purchased a parcel of land close to family, shopping and work. You have hired an architect, engineer and builder and the blueprints are ready for the next stage of building. How do you fund the building of the home? What kind of loan is available for building a home from scratch? Is a construction loan more expensive than a standard mortgage loan of a preexisting home?
You can apply for a construction loan from financial lending institutions such as banks, private lenders and insurance companies. There are two main groups who seek to use a construction loan -- builders and potential home owners. Construction loans are different than standard mortgage loans.
A construction loan is unique, specialty type of loan. A construction loan is considered a short-term loan and varies greatly from a standard mortgage loan. The terms of the length are the primary difference. Construction loans are typically paid back in full within in an agreed number of years and not a span of 15 or 30 years like a typical mortgage for a pre-existing home. Construction loan duration is usually geared to be repaid when the construction period is completed. The funds are usually granted and released to a builder who uses them as needed for the building of the new home. Payments for the construction loan are usually delayed for at least one year from the original release of funds.
Construction loans have varying features for homeowners seeking a short-term loan. The main feature a homeowner should seek in a construction loan is the roll over feature at the end of the building phase. The roll over feature allows the homeowner to transfer the construction loan to a regular standard mortgage without paying costly closing costs for a second time. The avoidance of double closing costs is usually when the homeowner applies for a construction loan directly. If a builder funds the project, the owner will not have the option of roll over and will need to apply for a standard mortgage. The choices for construction loans and features of roll over will be contingent upon the lender. The lender evaluates each construction project for the possible merit and investment the home will yield.
Construction loans are offered by most lending institutions. Criteria for loan approval, as with standard mortgage applications, are strictly reviewed for risk. Construction loans are chiefly short-term loans. The only interest option is variable rate loans. Construction loans are contracted for short-term duration and involve straight interest payments. The loan is due and payable upon completion of the construction of the home. Once interest payments are due, they will be payable every month until the construction is finished.
Building your dream home
Building a dream home from scratch, blueprints and designers may be the path of homeownership chosen. Funding the home building will require a construction loan from a bank. The loan is considered a short-term loan and is expensive due to interest-only payments during the phase of building. A construction loan is processed in a similar way to a standard loan, with closing costs and reviews. Try to compare the features available to you when applying for a construction loan. The most important feature of a construction loan is the roll over option for cost savings.