Construction Loans ~ Which are best?
There are two types of construction loans used by homeowners;
1. One-time-close loans
2. Two-time-close loans
With all construction loans, money is disbursed by the lender based on a pre-established construction draw schedule. The goal is to only pay for what has been completed, minus retainage, typically 10% of the cost of the project, which is held back until everything is completed properly and the owner is issued a certificate of occupancy (CO).
One-Time-Close Construction Loans...
This loan has one approval process, and one closing, simplifying the process and reducing the closing costs. Typically, the borrower can choose from the portfolio of mortgages offered by the lender such as 30-year-fixed, or various ARM’s (adjustable rate mortgages). Fidelity Bank Mortgage will let you lock in a fixed rate up front, with a free “float-down” option allowing you to get a lower rate if rates have fallen upon your homes completion.
Construction loans are typically interest-only and you will pay only on the money that has been disbursed. So your loan payments grow as progress is made and more money is released. When the home is completed, the total amount borrowed during the construction loan automatically converts to a permanent mortgage.
Benefits of one-time-close construction loans:
1. You pay just one set of closing costs.
2. You are approved at the same time for both construction and permanent financing.
3. Multiple options for permanent financing give you flexibility.
Two-Time-Close Construction Loans...
A two-time-close loan is actually two separate loans; a short-term loan for the construction phase, and then a separate permanent mortgage loan on the completed project. Essentially, you are refinancing when the building is complete and need to get approved and pay closing costs all over again. During the construction phase, you will pay only interest on the money that has been paid out, so your payments will be small, but increase as more money is disbursed. There may be a maximum duration for the loan, such as 12-month, after which penalties kick in.
Banks will typically add a 5-10% contingency amount for cost overruns, an all-too-common occurrence on home construction projects. In any event, it’s best to qualify for the highest amount possible. Think of it as a line of credit that is nice to have in place in case you need it. Because of two loan settlements, closing costs will be greater for this type of loan.
Only disadvantage to thee loans are;
1. You need to be approved twice and pay closing costs twice.
2. You face risks if your financial circumstances change when you apply for permanent financing.
3. If you don’t get approved for permanent financing, you could face foreclosure.
Your best advantage in the construction to permanent (CP) loan process is a reputable loan officer who has originated numerous home construction projects from beginning to end. I have over 19 years of CP experience. My job is to put together a strong loan program to fit your needs and then help you through the construction process. Our Fidelity CP/Renovation Loan Program is a One-Time-Close Construction Loan program that will allow the financing of your lot and construction, together in a one-time up front closing, with two phases. You can build a new home, or renovate a current home with this program. Contact me for further information;