Understanding How Construction Loans Work and Who Qualifies For ThemInk Well Mag April 29, 2016 0 COMMENTS
When you’re considering building a home, your builder may have mentioned a construction loan. But what exactly is it? While most people understand how a basic mortgage works, some are confused about constructions loans especially those that have never built a home before. It is important to understand that these types of loans are different from traditional loans.
The difference between a traditional home loan and a construction loan
With a mortgage, you get to borrow say for example for 20 years at a fixed rate while paying the interest and principal for the duration of the loan. You can easily access this type of loans through VA, FHA or a conventional lender.
On the other hand, a construction loan is meant to last for the period of time it will take to build the house according to Utah experts, American Loans. Furthermore, you only get to pay interest as you go. For example, if you have a $250,000 construction loan, you only have to pay after the builder draws a request say for something like $10,000. You only get to pay interest on the $10,000.
Construction loans have variable rates that tend to fluctuate depending on the prime rate. Additionally, the rates are higher than those of a permanent mortgage loan. For you to get approved, the lender will need to see your budget, construction timetable, and a detailed plan. This is what is referred to as the story behind the loan.
After the approval, you are required to put on a bank draft or draw the schedule that will follow the construction stages and you’ll also be required to make interest payments.
Do you need both a mortgage and a construction loan?
After your home’s completion, you’ll need a mortgage to pay off the construction loan.
If you’re thinking of getting a construction loan, it’s best to talk to a trusted lender in Utah who will guide you through what you need to know about these loans. You will be advised on how the loan works plus the terms you have to adhere to.