According to new reports, demand for new construction is still skyrocketing, especially among first-time homeowners. This is true even as companies around the world face material and labor shortages and timelines for new builds are longer than ever.
If you’re interested in building from the ground up, then a construction to permanent loan may be your best financing option. Also called a single-close loan, this loan can help you finance both your new home and the land you’re building on.
What is a construction to permanent loan and is it a viable option for you? Today, we’re diving into how it works and what to expect.
1. Single Loan Process
Administrative duties are some of the most time-consuming, expensive, and complicated parts about taking out a loan. In addition to the documents you have to bring and the stacks of papers you have to sign, there’s also the long process of applying and being approved for the loan. Then, don’t forget the closing costs.
With this type of financing, you’ll roll everything into one general loan. In addition to one simple payment, you’ll also have one set of closing costs. In addition to residential builds, some lenders will offer this option to businesses looking to secure a commercial real estate loan.
With other types of financing, you’d have to complete these steps two times. Once would be for your construction loan, and the other would be for your mortgage. A construction to permanent loan cuts out that last step and only requires one closing.
2. Generous Loan Amounts
Before you can begin building any type of home, your first step is to secure a plot of land. Whether you want to live out on 300 acres or on a small concrete slab in a neighborhood, you can’t simply start building on the first open site you find.
Unless you inherit land from your family, you’ll need to purchase this property. Then, you would normally begin the building process. With a traditional construction loan, you’ll receive funds to cover both the price of the land and the cost of construction.
Then, you’d take on a second loan to cover the mortgage once the house was completed. For some homeowners, this is a fine setup and they don’t mind balancing the two payments. However, you can save time and money by considering a construction to permanent loan, instead.
With a construction to permanent loan, most lenders will finance projects up to $2 million in value. Considering how high land prices have catapulted in recent years, it can help to have that substantial amount of wiggle room as you plan and purchase your home site.
3. Operates as Line of Credit
As you’re building a home, you’ll inevitably encounter costs around every corner. These can include both planned and unplanned expenses. One of the best parts about a construction to permanent loan is that it operates similarly to a line of credit.
This means that you can spend the money at your discretion, drawing the specific amount that you need at the exact time that you need it
4. Only Charged on What You Draw
Don’t need to tap into your full loan amount? No problem. During the construction part of your project, your lender will only charge you interest on the amount of money that you actually use.
Throughout that phase, the only monthly bill you’ll receive is the interest payment that you owe. This can help you conserve your money while you build your home. Most lenders will require that your construction be completed within 18 months or less.
Whether your project is right on time or lags a little longer than expected, you’ll appreciate the lower payments.
5. Ability to Lock in Rates
Though each lender will differ, most borrowers find that they’re able to lock in a fixed interest rate on their construction to permanent loan. In many cases, they can do so up to 18 months in advance.
This can be a great way to take advantage of a low rate if your lender offers one. Especially given the volatility of the current market, this is a major advantage.
Potential Drawbacks to Keep in Mind
While a construction to permanent loan can be a great option for many prospective homeowners, it does have a few drawbacks to keep in mind. Let’s take a look at some of the most important ones to know.
Larger Down Payments
Though it isn’t the case everywhere, some lenders may require a higher down payment on a construction to permanent loan. While some traditional lenders will work with you if you can’t put down the expected 20%, that allowance isn’t usually made here.
When you go to put down that payment, you may also find that the initial paperwork is more involved, too. You may need to include statements from your contractor, proof of builder insurance, and more.
Higher Fixed Interest Rates
Some lenders will tack higher fixed interest rates onto their loan, primarily during the building phase. If you anticipate a long build, this could work to your disadvantage. To understand why this is the case, consider the level of risk that the lender is assuming.
Not only are they paying to cover your land, but they’re also funding your construction and your mortgage. Plus, they might not start receiving principal and interest payments until everything is finished, and that can take up to 18 months. In this light, it’s understandable that interest rates are a little higher than you’d find with a traditional loan.
What Is a Construction to Permanent Loan? Now You Know
If you’re planning to put down roots in the near future, then it’s worth looking into your financing options now. What is a construction to permanent loan? In short, it’s a loan that allows you to roll every step of your project into one lump sum.
Going this route can make it easier to plan and pay for your future residence. Speak to your lender to see if it’s an option, and learn more about the fine-print details before signing on the dotted line.
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