The time has finally arrived to build your dream home! Whether it's a tiny ranch or luxurious Craftsman house plan, your dream home will soon be a reality! The first and often most overwhelming step in the home building process is obtaining financing for your project. There are several options available today that will ensure that you find the right financing for your budget. You'll really want to shop around and contact as many lenders as you can to get the most up-to-date information on loan programs and qualifications since loans are constantly changing, particularly home construction loans.
Home construction loans are typically referred to as "story loans" because the lender will want to know everything behind the construction of your home. That plays a big role in the interest rate and the options for repaying the loan. Home construction loans are less "cut and dry" than a traditional 30-year fixed rate mortgage. In fact, home construction loans will depend on the actual type of financing you want and the type of home you're building. In other words, your lender will want to know the whole "story" behind your loan. Here is some helpful information to help you get started on finding the right home construction loan:
How Home Construction Loans Work
Generally speaking, home construction loans are short term, variable rate loans. They will be priced at a short-term interest rate, which will depend on what's called the "draw schedule." The lender, the home builder/contractor, and the borrower will agree on a schedule for the construction. Traditionally, there are five to ten different stages of construction and the lender will charge interest based on the amount of money that has been "drawn" to date. In most cases, the borrower will have the option to take out a construction loan that will then "automatically convert" to a permanent mortgage when you move into the home - or you can structure it so that there are two separate loans. Some home construction loans can be written so that they include the cost of purchasing the land as well as building the home.
Different Types of Home Construction Loans?
There are generally two different types of home construction loans, and each of them have their benefits. As a borrower, you should understand the different options that you have when it comes to financing your new home. The names of the loans do a good job of saying what they do and how they work, but let's go over them in more detail.
Whether you choose a construction-only loan or a one-time closing loan really depends on your personal preference and your particular financial situation. If you're looking for the security and piece of mind of a loan that will ultimately convert into a permanent loan, then you may want to choose a one-time closing loan. However, if you can afford the upfront fees and cost of a construction-only loan, then you'll have additional time in order to "shop around" to find a mortgage when you're ready to move into your dream home.