Pros and Cons of Construction Perm Loans

Construction perm loans are a type of loan that involves including the payment for the construction of a piece of property as well as the ongoing mortgage on the property once it is built. This type of loan includes several advantages and disadvantages for borrowers. Here are some of the pros and cons of construction perm loans.

Pros

One of the biggest advantages of this type of loan is that you are only going to have to close it once. With other construction loan scenarios, you have to get a construction loan, and then a separate mortgage once the construction is finished. This can lead to a lot of extra paperwork, stress and time. 

By combining all of the closings into one, you can also reduce the amount of closing costs that you will have to pay. Closing costs on a loan can be expensive. This means that if you can eliminate a closing, you can potentially save yourself a lot of money.

Another advantage of using this type of construction loan is that you may be able to lock in a good interest rate early in the process. For example, if when you begin construction, the interest rate in the market is four percent and you are afraid that the interest rate could go up over the course of the next several months, it may be wise to lock in the interest rate now. This way, you can avoid having to pay additional interest over the next 30 years of your mortgage.

This type of loan can also encompass three different loans for you. You will not have to get separate loans for the purchase of the land, paying for the construction and for getting a mortgage. Instead, you can simply lump everything together and handle it once.

Cons

Even though this loan program can provide you with some advantages, there are a few potential drawbacks as well. It can work against you if you lock in a high interest rate. If the interest rates in the market decrease while you are building your house, you will have a higher payment. This could cause you to miss out on a lower mortgage payment as well as saving thousands of dollars over the course of the life of your mortgage.

In some cases, lenders will allow you to adjust your interest rate if it moves in your favor while you are building. However, when this option is allowed, you will be required to pay an additional fee. Many times, you have to decide in advance whether you want to purchase this type of interest rate protection before you close the loan. Sometimes, this results in paying extra money for something that you really do not need and it can add to the overall closing costs of the loan.

Be careful in choosing the right option for your new construction. Ask the loan agent to give you as much information as possible before you make a decision.

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