If you’re thinking of building a home, you may be wondering how a construction loan works. Check out this quick guide to learn the ins and outs of construction loans so you can make an informed decision.
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What is a construction loan?
A construction loan is a short-term loan—usually about a year—used to fund the construction of your home, from breaking ground to moving in. With a BB&T construction-to-permanent loan, your construction financing simply converts to a permanent mortgage when your home is complete. During construction, you only pay the interest on your loan, and your payments may be tax-deductible. Disclosure 1 1 The BB&T Construction-to-Permanent loan is a single loan that lets you finance the construction of your new home and purchase it when it’s complete. This necessitates two closings and requires you to pay closing costs twice. Rather than get two loans, some borrowers decide to finance their new home with a single loan called a construction-to-permanent loan that converts to a mortgage once their dream home has been completed. With this option, you make interest-only payments during construction until the balance of the loan becomes due upon completion of your new home—usually 12 months later.
How does a construction loan work?
A construction loan is a short-term loan used to finance the building or renovation of a home or other real estate project. The construction loan is typically only used for the duration of the project, until it is time to take out a permanent mortgage.
Construction loans are typically taken out by developers or investors who are planning to build something from scratch, or renovate an existing property. The loan is used to cover the cost of materials and labor during the construction process. Once the project is completed, the borrower will then need to take out a separate mortgage to repay the construction loan.
Construction loans can be either fixed-rate or variable-rate loans, and are usually available for terms of 12 months or less. Interest rates on construction loans are typically higher than on regular mortgages, because they are considered riskier loans.
What are the benefits of a construction loan?
There are several benefits of a construction loan:
-You only have to make one application and one set of closing costs.
-Construction loans are available for both owner-occupied and investment properties.
-They can be used for rehabilitation oradditions to an existing property.
-Construction loans are available with both fixed and adjustable rates.
What are the drawbacks of a construction loan?
One of the main drawbacks of a construction loan is that they can be more expensive than a traditional mortgage. This is because they are considered to be higher risk by lenders, and as a result, they often charge higher interest rates and require a higher down payment.
Another downside of a construction loan is that the process can be more complicated and time-consuming than traditional mortgages. This is because construction loans involve two stages: the first stage is the loan for the land purchase, and the second stage is the loan for the construction itself.
This means that you will need to go through the application process twice, and there is also a risk that your construction project may not meet the lender’s requirements. This can lead to delays in getting your loan approved, and it can even mean that your loan is ultimately rejected.
How can I get a construction loan?
Construction loans are typically short-term loans with a maximum of one year and have varying rates. They are secured by the equity in the property – usually a down payment – and are paid out in installments as the construction on the property progresses.
There are several ways to get a construction loan, but the most common is through a small local bank or credit union. The advantage of this method is that you can usually get a lower interest rate than you would with a larger bank. The downside is that it may be more difficult toQualify for a construction loan from a smaller lender.
Another way to get a construction loan is through the government-sponsored Home Loans program. This program offers low-interest loans for qualified homebuyers who are building their own homes. The disadvantage of this program is that it can take longer to receive approval for the loan, and you may have to put up collateral, such as your home equity, to secure the loan.