The Advantage Of Getting A Home Construction Loan
Many homeowners find that they can save a great deal of money by taking a patch of bare ground and building their home. Still, most do not have enough cash or liquid assets on hand to fund the construction. Fortunately, there are advantages to getting a home construction loan over a traditional mortgage.
At home construction loan is very different from a traditional fixed-rate mortgage. One major difference is that this is a short-term loan and the homeowner pays short-term interest rates. However, unlike a traditional mortgage, this loan is not dispersed in one lump sum. This type of loan is set up so that the homeowner may draw a certain amount at different stages of the construction in order to pay contractors and buy more materials.
Interest is typically only charged on the amount of money that has already been drawn. It is quite common to have these loans set up so that there is a draw at anywhere from 5 to 10 stages of construction.
There are also two distinctly different types of home construction loans. One type, identified as either a one time closing loan or a rollover loan, starts out as a variable rate construction loan with draws and all the normal terms one would expect with this type loan. After construction is completed, this loan converts to a fixed term mortgage with the principal amount being equal to the amount of the construction loan in total.
This type of construction loan is much easier on consumers and lenders because it is understood that the loan will automatically convert to a mortgage upon completion. The one major drawback is that the homeowner will not have an opportunity to shop around and attempt to find a lower interest rate for the mortgage loan.
The other type is a construction only loan. The primary difference in this loan is that when construction is completed and the owner is ready to move in, the entire balance of the loan is due. Essentially, this means that the homeowner will have to apply for a separate loan in order to pay off the construction loan. This separate loan will be a fixed-rate 30 year mortgage.
The advantage of this type loan is that one will have the opportunity to shop around among different lenders and take out the mortgage loan was the most advantageous terms for the homeowner.
No matter which type of home construction loan a person applies for, all potential lenders will be very interested in hearing the story behind the decision to build a home rather than purchase one. Additionally, the individual is very likely to have to produce blueprints and plans for the new home so that the lender can estimate the value of the home when construction is completed. The lender will also want to know how much equity the homeowner intends to put up at the front end in order to determine what percentage of the home's value is being loaned.
All in all, the advantage of a home construction loan over a traditional mortgage lies in the fact that it generally costs less to build a home than to purchase one. It also provides the homeowner with more equity in the home at the beginning of the mortgage term than a traditional mortgage loan.