Even though construction loans seem very easy to calculate in theory, the truth is that they tend to get more complex during the implementation phase. Unexpected payments and the fact that this is probably the second largest loan after a mortgage, should determine you to weigh your options carefully before applying for this loan. One of the biggest concerns over the construction loan is the interest rate, as it has a tremendous impact over the entire sum you will need to return to the lender. This is why it is very important to look for a lender that can offer low interest rates and the freedom to choose your own schedule of disbursement.
One of the aspects that distinguish this loan is the fact that the borrower will only need to pay the interest rate during the time the house is built. Therefore, you should expect to pay a certain sum and interest rate each month only after the house receives its certificate of occupancy. Due to these features you should know that the land where you are building your new home represents the equity of the contract. The interest rate is typically calculated according to the type of scheduled payments you choose and, of course, the entire sum of money that you borrowed for the construction.
The two types of scheduled payments of the construction loan
If you are interested in applying for a construction loan, then you will be able to choose between two different types of payments. One type of payment is the classic distribution of the money. This is usually done with three different disbursements representing thirty percent of the total sum you borrowed and the last ten percent after the final inspection of the house. However, if you find the method too rigid, you should look for a lender that can offer you as many disbursements as you see fit.
There are some lenders out there that will mandate you to opt for their preferred scheduled plan, while others will let you choose the disbursements as you see fit. It is important to pay attention to the method stipulated in the contract and change it, if you have to, to the one you see fit.
The types of home construction loans
Due to the market’s diversity and the different needs of the borrowers, you have numerous available construction loans to choose from. The simplest way to finance the building process is the one-time close agreement, that enables you to pay the loan and the interest rate during the construction, or after the house is complete.
If your finances do not allow you to make this kind of payment in such a short period of time, then you can opt for a two-time close, which consists of two separate loans: one for the construction phase and another one for the long-term financing. This is the most common type of construction loan and the most beneficial, as you will only pay for the interest rate during the construction and after the building is completed, thus you will be able to sign a mortgage agreement.
If the costs are higher than you expected, then you can opt for the modification loan, which is a combination of the first two types of closes that will, however, provide the additional money you need to finish the project.
Making an estimation of the final costs of the construction loan
There are a lot of factors that you should take into account when you decide to apply for a construction loan. What most people calculate when they want to make an estimation of the total sum they need to borrow, is the actual cost of the construction, materials and labor. However, the soft costs, such as, zoning permits, logistics, blueprints, inspections, and so on, tend to accumulate into a large sum when added together. Moreover, if you have not purchased the land yet, you should take that into account as well.
You see, because most people assume that all will go according to plan, they often forget to add additional fees that they may need to pay in the event that the construction is delayed or the costs of the entire project become significantly higher than anticipated.