A Few Things You Need To Know About Construction Loans
Having your home built to your specifications can be the only way to get the home of your dreams. Unless you have the money to pay for the construction, you are going to need a construction loan. While you may already have a mortgage for the property where you will have your house built, a construction loan is a different thing altogether. Here are a few things you need to know before deciding you do not want a prebuilt home.
Funds are Given in Installments
When you buy a prebuilt home, the funds for the property are given to the seller at closing. This is when your loan term begins, and you are immediately responsible for making mortgage payments. A construction loan is different in that the lender gives the construction company money in installments as the work is completed. The company must buy the materials and pay the workers out of their own funds until a phase is completed, and the lender inspects and approves the work.
These installment payments mean you are not responsible for making payments on the whole amount until the building is complete. In fact, you will only have to pay the interest on each installment while the house is being built. This can be very beneficial as you will still be paying to live somewhere until you can move into your new home.
Continual Inspections
As stated above, the lender is only going to pay an installment on the work done once it has been inspected and approved. This means that you can be sure your house is solidly constructed and up to any municipal codes. You should not have to worry about needing to have any repairs done due to structural issues for many years unless there is a natural disaster or another catastrophe.
Interest Rate
Unfortunately, construction loans usually have a higher interest rate than other mortgage types. This means you are going to be paying more monthly than you would for a loan of the same amount on a house that is already built. If you are also paying the mortgage for the land, you may find you could get a bigger house for the same amount monthly.
The best way to be sure you understand what to expect financially when getting a construction loan is to have a meeting with the construction company and the lender. This way, the three of you will be sure to know what is expected and how much it is going to cost you to get into your new home.
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