A construction loan will be necessary to fund the building project. There are a few paths open to you. Keep in mind that not every lender provides this kind of loan and that some of those that do may not be the most user-friendly. The top construction companies, however, will have relationships with several lending institutions and will be able to steer you in the proper way.
Construction-Only
The costs associated with constructing your house are the only ones covered by a construction loan. During construction, you pay just the interest on the loan, just as with a construction-to-permanent loan. After the construction of your house is complete, you'll be responsible for repaying the loan or securing a mortgage. If interest rates decrease or your circumstances improve, you may be able to refinance this loan at a more favorable interest rate. Yet there will be double closing charges for you to pay.
Construction-to-Permanent
Most new-home construction financing takes the form of a construction-to-permanent loan. You make interest-only payments to the lender while they release cash to the home builder at regular intervals. After construction is complete, the bank will conduct an inspection and convert your construction loan into a mortgage (conforming, VA, FHA, etc.). The convenience of paying just one set of closing expenses is a major perk of this sort of financing. Also, your interest rate will be secured. You won't need to stress over it even if mortgage rates go up.
Builder Financing
Several home builders provide their own financing plans. For instance, Reinbrecht Homes provide 0% interest on building loans up to $200,000, with financing rates of $20 per $1,000 for amounts exceeding $200,000. Instead of requiring as much as a 20% down payment, Reinbrecht only asks for as low as $1,000 at the time of signing. No interest is due during the building, and no further payments are due until the permanent mortgage is closed once we finish the project.
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