Construction Loans Briefly Explained

When it comes to construction loans, some individuals may be unaware that they even exist. There are two types of construction loans to consider. First off, there are construction to-permanent-construction loans. During these loans, you essentially borrow money to pay for the construction. When it’s complete, the lender will convert the loan balance into a permanent mortgage. Essentially, this type of loan accomplishes two tasks as with a construction to-permanent-loan, there is only one closing. This subsequently reduces the amount an individual pays in closing fees. During the construction phase you pay interest only on the outstanding balance. The lender will convert the construction loan into a permanent mortgage once the contractor has finished. Once this is done, you then have the option to choose the terms of your mortgage.

Similarly, there are stand-alone construction mortgages. In this situation, the first portion of the loan covers the costs of construction. When you move in, you are then given a mortgage to pay off the construction debt separating it into two different loans. The stand alone construction loan will likely allow you to make a down payment, a factor which can be incredibly beneficial. This can be an advantage for someone who plans on staying in their home until the construction has finished. Although, differently from construction-to-permanent loans, you will have to pay two separate closing fees.

Both of these loans can be great options for differing individuals depending on your circumstances. Contact your loan officer today to learn more about construction loans!