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Securing financing for your custom home can be intimidating, but being aware of your options is half the battle. A construction loan is the primary option when it comes to custom home building. Here are a few common questions and answers regarding construction loans. Remember to consult your custom home builder if you have any specific questions regarding the financing of your project. 

 

What is a construction loan?

A construction loan is essentially a large line of credit used to finance the construction of your new home. A construction loan is to a home under construction as a mortgage is to a completed home. The main difference is that with a construction loan, you pay interest only on your outstanding balance. For example, if you take out a $500,000 construction loan but only spend $375,000, you’ll be paying interest only on the balance you owe (i.e. the $375,000). Construction loans are short-term loans and typically carry variable rates. To apply for a construction loan, you’ll need detailed plans for your new home, a timetable of construction, and a down payment.

 

What are the different types of construction loans?

There are two main types of construction loans. Both of them have benefits and disadvantages, so be sure to research the different options you have available before landing on your final decision.

 

Two-in-One

The two-in-one loan (also called the construction-to-permanent loan) is, as its name indicates, a loan that acts as a construction loan during the building phase and then converts to a mortgage once construction is complete. During construction, your loan will almost always have a variable interest rate. Once your loan is converted into a mortgage, however, you can usually choose between a fixed or variable-rate structure. Because it involves applying for only one loan, this option saves money on closing costs and associated fees. It does, however, require a higher down payment than a construction-only loan.

 

Construction-Only

For those who are still making payments on their current mortgage, a construction-only loan can be an excellent financial option. Construction-only loans are obtainable with a lower down payment than two-in-one loans. Keep in mind, however, that you will have two sets of fees to pay, and be certain to consider all factors involved with signing a construction-only loan.

 

How can I take advantage of a construction loan?

When it comes to choosing a construction loan, there are a couple of ways to go about it. It’s always a good idea shop around to find the loan with the most advantageous terms.

 

Through Your Builder

If you’ve already decided on your custom home builder, it’s wise to first find out if they work with preferred lenders. Often, custom home building companies will have working relationships with local banks and credit unions, and that pre-established relationship may help sweeten your deal.

 

Directly From a Lender

If your builder doesn’t have a preferred lender, or if you haven’t decided on your custom home builder, you can apply for a construction directly through a lending institution. Keep in mind that the more information you have finalized (e.g.. down payment, construction schedule), the easier it will be to obtain a favorable loan.

 

If you’re ready to move forward with the home building process, contact Castle Brook Builders. The experts at Castle Brook can walk you through each phase of the construction process. Our team has the knowledge and professionalism needed to make your dream home a reality. From identifying your optimal loan to designing your custom floor plan, we have you covered! Schedule your consultation today. 

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