What Is a Construction Mortgage?
A building mortgage is another term for a building loan, money borrowed from a lender to cover building a new residence. This is sometimes done as a self-contained loan, or it can be a construction-to-permanent loan, which pays for building, then converts to a typical mortgage if the residence is built.
Function
The function of a building loan would be to pay for constructing your new home. The money is paid out through construction whenever it is required, and in most cases you pay interest on the loan, the Investopedia website states. Once construction is finished and you have received a certificate of occupancy, the key is because, unless you’re using the construction-to-permanent alternate.
Characteristics
Construction loans are usually variable rate loans attached to some short-term interest rate like the Prime Rate, the Bankrate website states. The interest at any given stage is charged not on the whole loan, but on the amount that’s been disbursed to the builder up to now. The loans are set up to operate to annually.
Benefits
After the building loan comes due, you’ll probably require a new mortgage to pay back the mortgage. Having a construction-to-permanent loan, the construction loan converts to a regular mortgage, which is fixed-rate or variable, when your home is finished. The advantage of all construction-to-permanent is that with just 1 loan, you pay just 1 set of loan fees rather than two, which can save you tens of thousands of dollars.
Considerations
Should you take out a construction-to-permanent mortgage, then you’re employing a house that is not built yet as your creditor’s collateral. Owing to that, the Bicoastal Lending Group states, the lender can’t have the home appraised as he would an present property. To satisfy your lender about the house’s worth, you’ll have to him plans, a detailed cost breakdown, the building contract and a description of all the materials your builder will use.
Drawbacks
Should you take out a construction-to-permanent loan, then it will lock you in your mortgage rate well in advance, the City Town website states, and when prices drop from the time the house is finished, you won’t have the flexibility to renegotiate. Some lenders, however, will supply the option from the original contract to decide on a lower rate if they drop.