The Basics of a Construction Mortgage

A construction mortgage is a loan taken out for building a home. It involves more paperwork than a purchase mortgage does. Here are some aspects of a construction mortgage.

Fundamental Features

The lender advances the funds in different stages of the construction. Usually, the lender makes available the funds at 35%, 65% and full completion of the home. Each advance requires a report from a property inspection firm. The report details the stage of construction of the property.

The borrower can take a construction to permanent loan. The financing allows the borrower funds to take on the services of a builder to construct the home. When the construction is complete, the loan converts to a regular mortgage. You may choose an appropriate fixed rate package.

If you do not take out a construction to permanent loan, you must pay the entire principal balance at the end of the construction. You will need to take out a regular purchase mortgage for this purpose. A construction to permanent loan offers you an advantage of paying the loan fees for a single mortgage.

Interest Payments

A lender generally offers adjustable rate loans for a short term appropriate for the time taken to build the house. The interest rates follow the prime rate. The borrower pays only the interest on the amount disbursed at each stage.

Issues Regarding a Construction to Permanent Loan

If you avail of a construction to permanent loan, the lender will lock your rate at the available value. This affords you an advantage if the prevailing rates were to rise. However, if the rates were to fall, you cannot avail of the benefits of the decline. A few lenders, however, do offer borrowers the option of taking advantage of the prevalent rates when they fall. Shop around for a lender who can offer you this feature. It is important to ensure that you do not have to go with higher rate, should they rise at any time during the construction period.

Some Crucial Considerations

In a regular purchase mortgage, your home serves as collateral for the loan supplied to you by the lender. Since this is not feasible in a construction mortgage, your lender will require you to satisfy additional necessities. You will need to provide the detailed plans of the home, a breakdown of the construction cost and the builder’s contract. You may have to detail the building materials your builder intends to use, as well.

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