New Home Construction Loan
New home construction loans are very
popular during times when interest rates are low and
home values are on the rise. New home construction loans
are loans that a builder begins building a home for you
and the lender releases funds as steps of the
construction process are completed. These funds that are
released to the builder are known as draws or
construction draws. Typically a builder sets the funding
up to receive anywhere from 4-6 draws from start to
finish. This way the builder is not financing the
construction of the home entirely themselves and they
receive the money they need to pay for supplies, to pay
the various tradesman and to pay themselves throughout
the construction process. New home construction loans
are very helpful to a builder and reduces the risk of
liability for a builder.
A construction loan allows someone to pay for the costs to build a new home. There are a variety of construction loans available, including spec, rehab, owner builder, and custom.
While most construction loans offer interest only payment during the course of construction, borrowers have many options when it comes to permanent financing once the property is complete. Popular options for permanent financing include cash flow arm loans which allow you to defer interest, interest only mortgages, and fully amortized principal & interest mortgages with fixed rates and adjustable rates available. Construction to permanent mortgage financing is available up to multi million dollar loan amounts.
There are some construction programs that allow you to cross collateralize your current home against the home you are building. You will need sufficient equity in your current property to make this effective.
A construction loan will need an end-loan which turns into a mortgage.
Usually you will only pay interest on the money that has been disbursed to date. Often this is an interest only payment. This allows you to keep your payments low during construction. You may also have the option of deferring the payments until after construction is finished. At that point you can refinance, and roll your payments into the final loan.
Construction loans are usually at higher interest rates, and they will usually require a much larger cash reserve(on hand cash in checking, savings, retirement) in the borrowers deposit accounts.
Not long after the completion of your newly constructed home many people will refinance out of their construction loan in order to lower the interest rate and monthly mortgage payment on their home loan. A construction loan does not usually have the most favorable terms and this is why many homeowners will refinance their construction loan to a different mortgage loan program.
If the home you are building will be a 2nd home, you may be able place a lein against the equity in your existing home if you do not want to put any cash down.
A construction-permanent loan is a construction loan that automatically converts into a permanent loan after the construction period is over. The benefit to this type of loan is that you don't need to refinance after the construction is finished. This also saves you fom having to pay closing costs again.
If you already own the land that you plan to build on, it can be used to decrease your loan to value (LTV). In a sense it can act as a down payment for your construction loan. You will need to know the approximate value of the land to know if the lower LTV is enough for your new construction loan.
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Information listed above is to be used for educational purposes only and is not guaranteed