Many people dream of home ownership. They can construct a new home or renovate or expand an old house. A construction loan is a short-term loan used to finance the construction of a residential property or a real estate project. It covers the cost of building a new home, including land purchase, labor, materials, and other associated costs.
Once the building is completed, the short-term construction loan can be converted into a long-term mortgage loan to repay the principal amount.
According to the Gulf South Real Estate 2021 report, All across Metro New Orleans, realtors have observed a shortage of housing inventory. The active number of home aspirants has risen 30% yearly, but the real estate market has decreased by 28%. Eager buyers are still looking for their ideal home. They have two choices: take a home construction loan or renovate the old. Although, the types of construction loans made it easy to construct a dream home.
A 10% mortgage for construction loans is quite affordable, and if you already have land, you can use the land equity for the down payment.
For prospective homeowners to manage the critical financial undertaking, a construction loan is a perfect solution to get the money you will need to pay for the building materials, labor, and other related expenses.
What are Mortgage Construction Loans?
The construction loan is a secured loan, and it covers all expenses from planning to execution and helps prospective homeowners to cover the cost of constructing or rehabilitating a home.
Mortgage for construction loans is different from traditional long-term mortgage loans. However, you can convert a construction loan into a long-term mortgage loan after the completion of the construction project. The Mortgage construction loan charges higher interest rates, and funds are released in sync with the construction progress.
Moreover, the bank will inspect the construction site to check the estimated construction cost. The home construction amount is released in stages to meet the needs of each stage of construction.
Construction loans are available at fixed and variable interest rates. The two types of popular construction loans are:
- Land Development Loans is a secured purchase loan with a low-interest rate that can be used for construction or sale.
- Residential Construction Loans are used for constructing larger residential construction projects or apartment houses.
The advantage of a construction loan is that it is released when you need them. It reduces the mortgage interest rate as you only pay interest on the money you have been given rather than the entire amount. This short-term loan has a better long-term mortgage interest rate.
Before applying for a home construction loan, it is recommended to compare the different interest rates of various lenders with an interst rate calculator to get the best bet.
More Value Loans
It offers more value to the loan if compared with the loan size to the property’s value as it is given in phases as the construction develops. It tends to reduce the risk percentage because periodic inspections leave no room for fraudulent activity.
Home construction loans involve more financial risks and uncontrollable variables like building materials, labor, and other costs, so you carefully evaluate all financial aspects and consult a reliable mortgage lender.
One-Time Closing
Today most home construction loans are wrapped up in a one-time closing cost for construction loans and all the mortgages on the completed project. Onet-time closing construction costs are a great way to close both the construction loan and meet every aspect of the financing of a new home at the same time. It streamlines the house loan program with a single loan. It eliminates the risk of applying for a second loan to pay off the construction loans. Closing one instead of two loans simplifies the process and reduces closing costs. In addition, the borrower has to pay only interest until the home is constructed. If the interest is fixed or falling, you can lock the interest rate at the closing and benefit from it.
Conventional Loan Financing
A conventional loan is a mortgage loan that a government agency does not secure. It is not Federal Housing Administration (FHA loans) loan. Its rules are set by Fannie Mae or Freddie Mac companies. It is the most common type of mortgage construction loan with fixed or adjustable interest rates for 15 and 30 years of mortgage repayment. The government sets the maximum loan amounts. If you want to exceed the conventional loan limits, you must apply for a Jumbo loan, also called a non-conforming mortgage loan.
Jumbo loans don’t follow the standards set by the Federal Housing Finance Agency (FHFA); thus, the loan size limits exceed conventional loans.
Conventional loans typically cost less because you don’t have to pay the upfront mortgage insurance premium. You can get the loan with a down payment as low as 3%. However, the down payment requirement varies depending on the property type and the area of the property. Every type of private mortgage lender, including banks, credit unions, online lenders, and mortgage brokers, offers conventional loans with higher credit scores and a lower debt-to-income ratio (DTI).
Utilize the Option of a Fixed Interest Rate
One of the benefits of the construction loan is that you get the fund when you need them. Terms are flexible, and you have to give interest only till the house is completed. Multiple drawings are made on construction loans as the construction develops; this makes the construction cost as low as possible. Home construction loans have fixed interest rates that help during the mortgage repayment process. You can have the mortgage construction loan on 30 year fixed mortgage or different adjustable mortgage rates. The interst rate calculator determines mortgage payments with different interest rates so you can reap the benefits of your home construction loans. A fixed interest rate is beneficial during repayment and gives peace of mind.
Additional Scrutiny
Although the Mortgage Construction Loan offers more flexibility than traditional loans, the loan approval goes through a strict process. Lenders and financial institutions intensely scrutinize their borrowers to prevent the risk of fraud and uncertainty. An independent party closely monitors every aspect of the loan and the construction project and ensures that construction work is going as scheduled. They have specific and detailed information about the dates, methods, materials, and workers to prevent any manipulation attempts.
Constant supervision detects any physical and financial fraudulent activity like false payment, inventory mismanagement, false representation of the work, or any improper action against the loan contract. The comprehensive supervision technologies keep close track of ongoing costs and the actual work being done and enable a transparent process from start to finish of the construction project.
Flexible Term to Clear the Mortgage
A construction loan comes in many shapes and sizes to facilitate easy approval and quick disbursal of money. A flexible mortgage payment is one of the options for home builders who want to pay low interest initially. You can choose a 30-year fixed mortgage interest rate or a different adjustable mortgage interest rate to clear off the mortgage construction loan. The adjustable-rate mortgage (ARM) allows the borrower to select from different monthly payment options, such as 30 years mortgage payment, a 15-year payment, an interest-only payment, and a minimum payment.
Though the initial interest rate is low for a few months, the following payments increase annually, often overloading the borrower’s pocket. You can use an interest rate calculator to calculate monthly mortgage, tenure, and interest rates.
The benefit of a construction loan is that you only have to pay interest on the amount you borrowed and not on the total sanctioned loan amount. The principal amount you can pay when the construction work is completed.
Final Thought
A construction loan is perfect for building a home that meets your needs. You can use the home construction loan to remodel, renovate, or build a new home. Home construction loan has easy approval and closure procedure, but you must know what kind of loan suits your requirement before applying. Find a credible and trustworthy lender who can guide you throughout the loan journey.