Question:

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.

Mortgage rates hit their lowest since 1955. Ask the home loan experts we recommend Quicken Loans how to take advantage of them.
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