The interest rate is variable during the build period and becomes fixed for the mortgage part of it. You will usually have two sets of closing (and associated costs) with this loan type – at the beginning, and then again as you refinance the larger mortgage. But the unique trait here, is the construction loan is handled as a separate loan to the mortgage that follows – the lender uses the first loan, to get you locked into securing the larger second one. Stand-alone construction loans: the name of this loan is a little confusing, as it WILL include a longer-term mortgage as well.Though sharing the commonalities already mentioned, they differ in the benefits they could present to you, as a borrower. There are two types of real estate construction loan: a stand-alone construction loan, and a construction-to-permanent loan. How the loan works more specifically depends on the type on loan you secure, and who you secure it with. Everything works off schedules and milestones that you had clearly set out to the lender to secure financing. You will make interest-only payments during the building period, typically based on a variable rate.Įxpect your lender to check-in every time before disbursing draw-period funds, to make sure the project is adhering to the schedule pre-approved by you, the builder and the lender. They are on a predetermined draw schedule to cover the costs of building. With a construction loan secured, you will receive installment payments for that first year of building. The larger part is usually 15 or 30 years. Most often, construction loans are short-term loans (one year or less) that turn into a longer, more conventional mortgage when building is complete.
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