What is a Home Construction Loan?

By Kevin Landis

A home construction loan is a loan that is given to use for construction on your home. These can be given out for remodeling or for building a brand new home. Most people that build a home may need help with financing that dream and the secret they all know is that a home construction loan will provide the finances they need.

What is a Home Construction Loan

A home construction loan is an interest-only loan and is meant to be a short-term loan. There are several factors that influence interest rates but they are usually higher rates than on a mortgage. The rates are higher due to the fact that the construction on the “asset” or your home is not done yet, therefore it is a higher risk. Home construction loans consist of an agreement between you, the lender, and your contractor that decide when the disbursements or “draws” are given out. The draws are usually decided based on a schedule of construction steps. The draws are not given out until the steps are fully completed.

Two Basic Types of Home Construction Loans

Home construction loans usually come in two basic forms; an all-in-one loan and a construction-only loan. The all-in-one loan starts out as a construction loan and then when the construction is finished it automatically changes over to a standard mortgage. An all-in-one loan has one set of fees and one closing cost, which is easier on all parties. There involves less paperwork and sometimes there are lower fees involved also. A construction-only loan is a loan that is given strictly for the construction of the home and after it is completed then the loan payment is due. Most borrowers like this type of loan because they can shop around to decide which lender they want to make a long-term commitment with.

Summing it Up

Home construction loans are very useful when you are trying to build your dream home or make your existing home into your dream home. These loans can offer you two different types and can be obtained through regional banks, mortgage companies, and some national lenders.

Related posts:

1. How How Much Insurance Do I Need After Being Approved For My Home Mortgage?
2. What Happens When I Refinance My Home?
3. What Type Of Mortgage Loan Should I Choose?
4. What Is An Interest Only Home Mortgage Loan?
5. What Are The Different Terms For A Mortgage?