Payment

Paying on a construction loan can vary depending on the specifics of the loan agreement. Generally, construction loans work a little like unsubsidized student loans. The person who has secured the loan will only be required to pay interest on the loan until the construction is completed, or in other words, until the homeowner has received a certificate of occupancy. Then the owner would commence payments on the principal of the loan.

Also similar to student loans, a contractor and homeowner would establish a draw schedule. As construction continues, the contractor would pull more funds from the bank. This is important to know because it will save the homeowner money. The homeowner will only need to pay interest on money that has been pulled.

Knowing how the basics behind interest only payments until completion and draw schedules is important to know in order for protection. Homeowners will be able to avoid scams knowing that it is possible to create a draw schedule instead of simply paying interest on the entire loan during the entire process of construction.

Construction to Permanent

One last way to set up financing for a construction project is to create a construction to permanent agreement. This means that once the project is completed and the certificate of occupancy is handed over to the homeowner, the loan would turn into a mortgage. This can be advantageous to the homeowner for a couple of reasons.

First, most construction loans are meant to be paid off quickly. However, with a construction to permanent loan, a homeowner may opt to pay a higher interest during construction in order to get a better interest rate on their mortgage. Once the construction is finished, they will switch over to the better rate. This could save the homeowner money.

Second, instead of filling out multiple applications, a construction to permanent loan can be done with one application. This will save the homeowner time and headache.

When a potential homeowner decides to do an addition on their home or construct an entirely new home they will need to secure a construction loan. Understanding the basics surrounding construction loans can be helpful in avoiding scams, saving money, and making construction a much less stressful undertaking. Potential homeowners should just remember to arrive at the potential lenders prepared with the story behind their construction, understand the payment process, and look into construction to permanent loans to see if they will help save money.