Building a house can be a costly proposition, but there is a special type of loan that allows for construction work to begin and proceed in stages. These are called construction-to-permanent loans. There are also normal construction loans with a usual down payment. Together, these tow construction loans take away the financial burden of building a property.
A construction loan is given for short terms, and carries high interest rates. At each stage of the construction process, the borrower can draw money and proceed to the next phase. These are called ‘draws’, and the total value of the loan is dependent on the value of the property to be built.
With construction-to-permanent loans, another feature is that the money need not be paid back at the end of construction. The loan is converted into a normal mortgage and then repaid as usual. The loan therefore serves to build the property and then converts to a mortgage for repayment. The fees for the loan are low, and interest rates depend on the prime rate.
The phase wise loan does not require a complete home as a collateral. If that is the case, lenders request for more details on the type of house and its material composition, the builder and the construction team, and so on. There is also the risk of rise in cost and unaccounted for funding requirements. This may require extra provisions in the customer’s budget as well. Other information related to the builder and their reputation, professional standing and history is also looked into before granting a loan on a full house as a collateral.
There are guides available on construction loans interest rates offering more information on construction loans.