On Construction Loans

By Dion Outhier


Despite the fact that construction loans are unique, we can't deny the fact that it can be different or similar to the conventional mortgage in some ways.

Three Common Options

Your credit score can help the bank know the interest rate you will pay when you lend some cash, including the amount of cash you have as a down payment. If you are looking for a construction loan, it is known that you will have an interest rate for the loan you made to create your home, and your final deed interest rate, which will only stop as soon as the home is completed.

For example, your interest rate for the construction loan in 12 months time will be 8.5%, and then it will be changed into an interest rate of 6.5% for a standard mortgage in a duration of 30 years for the final mortgage. There is greater risk when the bank lends you money is reflected by a greater interest rate of the construction loan since the house is not finished yet. There are times when mortgages are allowed to be adjusted by the banks and can lengthen even after the construction duration and a specific number of years from the time your house is finished.

Nevertheless, an interest rate is an added charge when one borrows cash. When the banks charge you because they have processed your loan, it is termed as "closing costs". All charges are not the same. Check out the annual percentage rate or the APR of the loan so that you will fully appreciate the charges. Since this includes the interest rate rather than time duration of the loan, it is much greater than the interest rate, while also considering the payment you made for the loan.

It is very significant that you know the things included in your loan. It is highly important that when the bank gives you the construction loan you have applied for, learn to budget the money well. Usually, once you closed the deal on your construction loan, you are given money for the land, labor and other costs by the bank. Since then, a "draw" must be submitted against the loan. It is common that on the construction duration, the banks will agree to four and six draws, however, there are others that offer higher than that.




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