Are you in the market for a new home? If so, you may be considering taking out a home construction loan. This can be a great option for many people, but it’s important to understand all of the details before you make a decision. In this blog post, we will discuss everything you need to know about home construction loans. We will also explain how our team at Built Right Homes can help you from start to finish!
What is a Home Construction Loan?
A construction loan is a short-term, high-interest solution that provides you with the money to construct your home from the ground up. As opposed to paying out of pocket, through a construction loan your lender will provide installment payments directly to your contractor as they complete different phases of building. Once all work has been completed there are two options available: convert it into a traditional mortgage or pay it off in full.
What Do Home Construction Loans Cover?
So what exactly do home construction loans cover? Well, a construction loan covers the costs that are involved in building a new home. Some of these costs may include,
- Contractor Labor
- Land
- Plans, Permits, and Fees
- Construction Materials
- Interest Reserves
- Contingency Reserves
- Closing Costs
Loan Rates
When obtaining a construction loan, it’s important to remember that rates are typically higher than typical mortgages. Generally, you should expect to pay around one percentage point higher in interest than with conventional mortgage loans. Furthermore, your credit score and the amount of money being borrowed will determine what rate is offered. Variable rates can also change over time so keep an eye on the current market when making determining which type of loan you will be taking out as well as the different payment plans available.
Does a Construction Loan Cover The Design Stages?
To bring your dream home to life, you’ll need to cover the costs yourself – construction loans won’t cover design fees. Before applying for financing, ensure that all necessary components are in place: an agreement with the builder, a timeline and budget layout as well as finalized designs. These steps must be finished before beginning the loan application process so you can be completely prepared when submitting documents.
Will the Loan Cover Costs Not Associated with Home Building?
When you apply for a construction loan, your lender will only provide funds to cover the cost of constructing your home. Rather than receiving any remaining money, payments are sent directly to the contractor as and when work is completed. Fortunately, this ensures that you never pay interest on more than what was required for building – providing peace of mind during such an important investment!
How Do Home Construction Loans Work?
When obtaining a construction loan, the costs associated with land and building are generally covered. However, such loans also typically require more input from the lender. For example, potential borrowers must provide their plans, budget projections, and timeline before being approved for financing. Using this data as reference points, lenders can then determine what amount of money to lend out in total.
Once you receive approval, the money won’t be given to you; instead, your lender will pay your contractor in increments. Furthermore, they may periodically assess the progress of the home’s construction before disbursing additional funds. This can be an ideal way to make sure that progress is being made as expected and things are running on track.
During construction, most lenders will typically require that you make interest-only payments. However, the principal does not start to be repaid until after the building is complete. This may differ depending on your lender and loan type; some construction loans come with an interest reserve feature where your lender calculates what the total amount of paid interest would have been and then builds it into the initial sum of your loan before disbursing funds.
Once the project is finished, you start repaying your loan like other home mortgages. You make month-to-month payments based on an established amortization timetable. With this payment structure, construction loans are just like any other mortgage!
Types of Construction Loans
When it comes to construction loans, there are a few options available. It’s important that you understand the nuanced differences between each loan so you can pick the one most suitable for your project! Understanding these distinctions will ensure that all of your needs are met and help keep costs down in the long run.
Construction to Permanent
The first home construction loan we want to talk about is a construction to permanent loan. This type of loan is essentially a combination of two separate loans: one for the construction phase and another for once the project is complete.
When taking out this loan, you will only have to go through the approval process once and won’t need to apply again when the construction ends. Once the loan has been approved, your lender will put aside a set amount to be paid out during the construction, and then when the project is completed, they will convert it into a regular mortgage.
This loan option can be beneficial if you are looking to complete a large project quickly and easily. However, this type of loan does come with higher interest rates than standard mortgages so make sure to factor that in when deciding.
Construction-Only
The second type of loan is the construction-only loan. This is only for financing the building portion of your project and does not come with a permanent mortgage option.
In this situation, you will need to go through the approval process twice – once for the construction loan itself and then again when it’s time to secure a regular mortgage. This can be a lengthy process and can add on additional costs due to the multiple applications. However, it also offers more flexibility in terms of being able to shop around for competitive interest rates.
Renovation
Another option for home construction loans is the renovation loan. This type of loan is similar to the construction-only option but can be used for more than just new builds – renovations, remodels and home improvements are all included.
This type of loan can be a great way to make sure your project stays within budget as it offers pre-approval for up to a certain amount. It also allows you to avoid the double-approval process as it works like a construction-only loan and then transitions into a regular mortgage once the project is complete. Overall, all of these types of loans can be great options for financing your home construction project.
Owner-Builder
Next, there is the owner-builder loan. This type of loan is specifically for those who plan to act as their own general contractor in order to oversee their home construction project.
Owner-builder loans typically involve a slightly higher interest rate than other types of construction loans but can be beneficial if you want more control over your project. Additionally, these loans allow you to borrow up to 95% of the total cost of your project.
End Loan
Last on the list of home construction loans is the end loan. This type of loan is taken out once you have completed your project and is designed to replace any temporary financing that has been used throughout the construction.
End loans are similar to regular mortgages but can offer more flexibility in terms of repayment terms, interest rates, and features like balloon payments or adjustable rate options. They can also be a great way to refinance the loan you used for construction and can help reduce costs.
When it comes to financing your home construction project, there are a lot of different options available. Be sure to do your research and compare the advantages and disadvantages of each type of loan to choose the best one for you. This will ensure that your project is completed on time and within budget.
How Can Built Right Homes Help?
At Built Right Homes, we offer a variety of services tailored to make your home construction process easy and enjoyable. Our team is equipped with the knowledge and experience needed to ensure that everything goes as smoothly as possible.
We understand that constructing a home can be confusing and overwhelming, so we’re here to provide you with personalized assistance in navigating the process. We offer assistance in finding the right loan type for your project as well as helping you secure it. Once you are approved, our team will work closely with you to ensure that everything is handled efficiently and effectively.
We are committed to helping you build the home of your dreams and making sure that you have access to all the resources and information needed to get there. For more information on our services and how we can help, please feel free to contact us today!
