Understanding Construction Loans

If you are planning on building a house, you are going to need to obtain a construction loan first. Construction loans work differently than a traditional mortgage. Here are the basics of the construction loan and how they work.

Periodic Withdrawals

One of the biggest differences between a mortgage and a construction loan is in the way that you are going to receive your money from the lender. With a traditional mortgage, the lender can give you the entire amount of the money upfront to purchase a property. They can do this because if you do not make your payments, they can simply take back the house and sell it. With a construction loan, this is not the case. Whenever you are building a house, there is not much for the lender to foreclose on if you start making your payments. Because of this, the lender is going to make periodic payments to you for the entire amount of the loan.

Typically, with a construction loan, you can expect to get four different payments for the balance of the loan. You will start out with 25 percent of the loan amount so that you can get started with construction. After you have completed 25 percent of the construction of the property, you can get another 25 percent. In order to determine how much of the project has been completed, you will typically have to work with a real estate appraiser so that they can verify how much was done. In this way, the lender can protect themselves and prevent people from taking the money and running.

Interest-Only Payments

With this type of loan, it is very common for the lender to require interest-only payments by the borrower. This means that you are only going to be paying the amount of interest that is accruing on the loan while you are in the construction phase. In addition to this, you do not have to pay interest on the entire amount of the loan. You are only going to pay interest on the amount that has been disbursed by the lender. This means that at the beginning of the loan, you are only going to be paying interest on the first 25 percent of the money. Your payment is going to continually increase as you get further along in the building process.

Completing Construction

At the end of the construction phase, the loan is going to be altered again. The lender is going to require full payment on the original construction loan. This means that you will most likely need to get a traditional mortgage to pay off the construction loan. In most cases, it is going to be in your best interests to secure the mortgage before you even start building. This way, you know that you will be able to qualify for the loan before you get involved with the construction of a house.

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