How does a construction loan work in the best possible way?
Answer:Home buyers dedicated to turning a dull piece of land into a dream residence would like to know how a construction loan could work in the perfect way for them.
Ideally, a construction loan will work as follows:
- It is a single-close loan financing the purchase of the lot, construction labor and materials for implementation of the design, and will transform into a permanent mortgage when the house is completed without incurring any additional fees;
- The construction loan requires interest-only payments on the disbursed amount throughout the construction phase;
- Interest-only payments would be possible to borrow, as well, if the home owner so desires;
- Interest rate of the permanent mortgage (either adjustable or fixed rate) can be reduced to match current market rates.
A double-close construction loan may not work as nicely. Make sure when getting your construction to permanent loan to find out if it is single or double close. If you have decided to use a pure construction loan until the occupancy stage is reached, than you will have to fund your custom built house twice and pay closing costs twice. Even though you may be able to get better rates shopping separately for a construction loan and a permanent mortgage, it is very likely this will be a more expensive way to go.
Our advice: Be sure to ask your lender about FHA loans. FHA loans have very competitive interest rates because the loans are insured by the US Federal Government. Even if you have had serious credit problems, such as bankruptcy, it is easier to qualify for an FHA loan than a conventional loan. Also, taking an FIXED rate loan while the interest rates are still low is a smart idea. Check your eligibility here:
| Not at all | Definitely |
Mortgage QnA is not a common forum. We have special rules:
- Post no questions here. To ask a question, click the Ask a Question link
- We will not publish answers that include any form of advertising
- Add your answer only if it will contrubute to the quality of this Mortgage QnA and help future readers
Common misspellings: mortage and morgage