Home construction loans

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There are a few types of home construction loans, but they all have advantages and disadvantages. It’s important that you know what the lenders is offering and what options do you have available.

One closing loan

It is also named “all in one” loan. After the construction is finished, the construction loan becomes a mortgage loan. During the construction the borrower can make interest only payments that will apply toward the principal of the loan. All the options depend on the lender. You can receive a fixed rate or a floating interest rate that will be set during the construction process.

Modifying loan

There are a few options that make a modifying loan different from a one closing loan. In this case there are two interest rates. Also this loan carries two separate closing costs, one for closing the construction loan and one for closing the mortgage loan.

Two closing loan

This is a more flexible loan. It allows you to change the lenders. It is like a combination of a one closing loan and a modifying loan. There is only one interest rate. The lender has the option of having the borrower make interest-only payments or make payments that decrease the loan principal. After the construction is done, the entire amount of the loan is due. Then the user will need to secure a mortgage that will cover the remaining principal of the construction loan. The main advantage is that you can go looking for different lenders that will offer you a lower interest rate.