What you need to know about constructions loans
The following are things you need to know about construction loans:
1. How to apply for them: If you want to apply for a construction loan you will want to recognize that it is not as simple as a typical mortgage loan, and the reason is that there is less security, after all, the house is not built yet. So, in order to even be considered for a construction loan, you need to show the bank some good reasons to put their money and faith in your ability to complete the building of the home. You do this by hiring a contractor who then draws up a budget, plans, schedule etc. Or, you do those things yourself. If you go to the bank with a budget, and bids, etc. to verify the claims and numbers you make in your budget, a schedule or time frame of how and when your house will be done, and some great home plans, they are going to be much more likely to lend you money. If you go them and say you want to build a house, will they lend you money, they will say no. They need assurance they will either get paid back, or have a house to take if they do not get paid back.
2. The terms and conditions. One of the things you want to know about a construction loan is how it differs from a traditional loan. There are going to be specific terms and conditions for your loan, and you need to know them. For example, a bank may say they will loan you X amount if you can show them verification that you have Y amount of funds available to be applied to the building of your home. You will also want to know things like how your interest is calculated, when you have to make payments, how money will be allocated to you, will it be upfront, in installments, part up front and the rest at completion? Etc. The terms are going to vary from loan product to loan product, so look at several, and look carefully at the variation in terms, and determine which works best with your plan for building your home. Do you have to own a lot before they will fund the materials to build on it? Etc.
3. Interest. Usually a construction loan has a higher interest rate than a typical mortgage loan, but you only have to pay interest while the house is being built. Once the house is complete the loan is refinanced and becomes a traditional mortgage where you make payments on principle and interest. Look around, do not settle for the first interest rate you are offered, rather compare. Interest gets expensive, so find the best rate you can.
4. Draws. When you have a construction loan, the way it usually works is the bank says they will lend you up to a set amount. Then you can make a specific number of draws on that amount. So, it is like you have an account with the money in it, and you can only withdraw money a certain number of times. So, you will want to plan your purchases, and your payments around when and how many draws you can make. For example, if you can only withdraw money 4 times, you will want to use the 60 days free of interest or whatever other programs there are at home improvement stores, such as Home Depot offer. This way you can take advantage of not paying interest on money you are using. As soon as you make a draw, you pay interest on the money drawn. So, avoid drawing out more than you need to, otherwise you have money sitting there not being used, and you are paying for it.
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