Perhaps you have chosen to have your new home built rather than buy an existing one or you are considering other types of large construction projects. In either case, the type of loan you receive will differ considerably from anything you have received in the past. We outline what to expect with construction loans below.
Understanding Construction Loans
Compared to a traditional mortgage, a construction loan comes with shorter terms and a higher interest rate. With a mortgage, the amount you pay depends on the fair market value of the home, its condition, and how much similar homes in the same area have sold for recently. The amount of a construction loan, on the other hand, depends on the home’s projected value once complete.
Types of Loans Available for Large Construction Projects
Banks and other financial institutions typically offer three types of loans to cover the expenses involved with large construction projects. These include:
• Construction-only loan: If you opt for this type of loan, you will need to pay it in full at the completion of construction. It can be a good option if you know that the proceeds from the sale of your last home will cover construction costs for the new home or you otherwise have a lot of cash available. Keep in mind you will need to obtain a second loan for the mortgage of your newly constructed home.
• Construction-to-permanent loans: This loan could be appropriate if you have a definitive timeline and construction plan already in place. Your lender then pays the builders as they complete the work. The cost of construction converts to a traditional mortgage when it comes time for closing. You will receive a fixed interest rate.
• Renovation construction loans: If you plan to buy a house that needs a lot of work and receive assistance from the government, this loan type could be right for you. When you close on the mortgage, it combines projected renovation costs and the purchase price of the property.
Need additional tips about loans for large construction projects? Contact Norus Capital today.