Not many know that other than mortgage loans, there are also construction loans that come with a different model. Construction loans are meant to facilitate building of homes by obtaining high-interest, short duration finance. The value of the loan is determined by the value of the house under construction, and payment of loan money is done in ‘draws’ or installments at every stage of the construction process.
Construction loans fall under two major categories. One is construction-to-permanent loans. These are loans where the customer borrows money and goes for construction. After moving in, the loan is the then converted to a mortgage. Thus the customer is taking two loans, for building the house, and then after moving in, to pay the debt.
The fees for this type of loan are less, as there is only one closing. The interest is paid on any outstanding balance during construction. The rate too is not fixed, and follows the prime rate. The owner can choose a fixed or adjustable rate and also select for how long they wish to take the mortgage.
The other type of construction loan is a stand-alone loan. This requires a down payment to be made. These loans are thus good if the down payment is small.
Construction loans cannot get a complete home as a collateral. This makes it difficult to get a loan, as lenders seek detailed information related to the house to be built, materials, contractors and their teams, etc. They also need assurance on repaying capabilities of the customer during the construction phase. They may want to know if the customer has savings to take care of any unforeseen expenses. Finally, lenders also look into the builder’s business, their creditworthiness, licenses and past experience.
Small businesses thus need to do a bit of exploration to find out about construction loans interest rates and which lender will be best suitable for their requirements.