Types of Home Construction Loans


Building a new home is an exciting undertaking. However, the unfamiliarity and intricacy of mortgage loans temper the enthusiasm of most people. If you intend to take out a home construction loan, here are the two types of home construction loans to know about. 

Construction-to-Permanent Loan 

A construction-to-permanent loan gives you a single closing. This lowers the fees you will be required to pay. When constructing your home, you will pay interest on the outstanding loan balance only. This loan has varying loan during construction. However, it moves up or down with your prime rate. For instance, if short-term interest rates goes up or down depending on Federal Reserve regulations, the interest rate of your loan will also change. 

This construction loan is converted to a permanent mortgage once home construction is completed. This permanent mortgage is just like other mortgages. You can have an adjustable-rate loan of a fixed-rate loan with a specific term. The term can be 15 or 30 years. 

Most lenders allow borrowers to lock a maximum mortgage rate at the beginning of a construction project. Generally, lenders require borrowers to make a down payment of 20% of the expected permanent mortgage amount. However, some lenders have exceptions. 

Stand-Alone Construction Loan 

This loan works out well for borrowers when it allows them to make down payments in smaller amounts. This is a major advantage for borrowers that are homeowners and don’t have cash for making a down payment yet they will have cash once they sell their home. With this loan, a borrower can live in their current home as their next one is being constructed. 

However, this loan has its drawbacks. For instance, the borrower pays two fees and for two closings. One payment is for a construction loan and the other for a permanent mortgage. Additionally, maximum mortgage rate can’t be locked. That means if the rates go up during construction, the borrower pays higher than the expected rate on their permanent loan. 

It’s important to learn more about these loans before making your decisions. Additionally, look for the best rates and policies when taking out any of these types of home construction loans.