In order for borrowers that are having their home constructed not to have to take out a construction loan, the builder can finance the construction and then the borrower will pay him by obtaining a traditional remortgage quote upon completion of the home. This would cost the borrower more money in the long run. But not all builders will finance the construction so, if that is not possible then the borrower can take out a construction loan. Construction loans are short-term loans taken out to finance the building of a home. These types of loans typically are paid off when the construction if finished.
Usually there is a document that goes along with the completion of construction and that is the Certificate of Occupancy. These types of loans are not standard in anyway nor do they get sold as a conventional loan would be, but they do have some things in common such as:
- They usually have variable interest rates
- The interest rate is typically priced at some rate similar to the prime interest rate
- They usually have payments that are interest only during the construction of the structure
- They are due and payable upon the house being completed
- The term is usually six months up to one year
Many lenders offer borrowers of constructions loans a construction-to-permanent loan program. This is due to the fact that borrowers using a construction loan to construct a home will also need another conventional cheap remortgage to then pay off the construction loan. This process calls for two mortgage applications with each one having its own fees and closing costs.
One of the advantages of the construction-to-permanent loan is that there is only one closing which lowers the costs greatly. Also, there is only one application for a loan involved. This type of loan not only provides the cost of construction but then turns into a traditional loan when the structure has received the Certificate of Occupancy.
It is very difficult for a borrower to comparison shop due to the fact that there are two very different options to deal with. The complexity of this situation makes it almost impossible for the borrower to compare interest rates because the borrower locks themselves into a specific deal at the beginning of construction. The decisions about which loan type to use are typically made when the borrower’s loan prior to construction closes. The borrower may choose either a fixed-rate loan or an adjustable-rate mortgage loan depending on their lender.
