Home Construction Loans

Written by Beth Hrusch
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There is more than one way to finance the construction of a home. However, the two most commonly used options are the use of two loans wherein one loan pays off the other, and a single combination loan. Each of these two types of loan have features that will determine which is the right loan for the individual.

Features of Construction Loans

One way to finance the building of a home is with a construction loan followed by a permanent loan. The initial loan lasts for the duration of the building process. It is then replaced by a loan that will be the mortgage on the home. The second loan pays off the first. With this financing method, you can shop for the loans separately and will incur two sets of closing costs. The first loan is usually at a rate that is reset periodically.

The combination loan incurs only one set of closing costs. With this loan, the construction loan used to finance the building of the home becomes the permanent loan. Many people get financing through the builder, who may offer better terms than a lending institution. However, it is wise to look into the points and processing fees involved to get a good idea of the final costs before settling on a lender.

Home construction loans are tailored to the building process, taking into account the time tables involved with constructing a home and the costs of building in general. Lenders who deal with these types of loans are familiar with the pitfalls of home building as well as the need for a reliable source of funding during this time. A good loan, offered by a knowledgeable lender, can make the construction process run smoothly.


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