Construction loans can be a complicated and confusing process, but we’re here to help.
Keep reading to learn everything you need to know about construction loans and how they can help you finance your new home.
What Is a Construction Loan?
A construction loan is a short-term loan that provides funds for the construction of a new home or other real estate project. The loan is typically dispersed in stages as the project progresses, and you’ll only pay interest on the amount of money that has been disbursed at any given time.
Once the project is completed, the loan will need to be paid off or converted into a permanent mortgage.
Before you even start the home building process, you’ll need to get pre-approved for a construction loan. This will give you an idea of how much money you’ll have to work with and will help you stay within budget.
Be sure to shop around for the best interest rate and talk to multiple lenders before making a decision.
Create a Detailed Budget
Once you have your construction loan in place, it’s time to start planning your budget. This should be a detailed budget that takes into account the cost of materials, labor, permits, and any other unforeseen expenses that might come up during the course of the project.
It’s important to stay organized throughout the entire process and keep track of all expenses. This will help you stay on budget and avoid any costly surprises down the road.
Be sure to keep all receipts and invoices in one place so you can easily reference them later on.
How Do Construction Loans Work?
Construction loans work differently than traditional mortgages. For one thing, you’ll usually have to make a larger down payment – often 20% or more.
Additionally, rather than being based on the value of the property, construction loans are based on the value of the project. This means that if costs go over budget, you may have to find additional financing.
Another difference is that construction loans are interest-only loans. This means that each month, you’ll only need to pay interest on the outstanding balance of the loan.
Your monthly payments will be lower than they would be with a traditional mortgage, but you’ll need to be prepared for a larger balloon payment when the loan comes due.
What Are the Benefits of Getting a Construction Loan?
There are several benefits of getting a construction loan when building a new home. First of all, it can be easier to qualify for a construction loan than for a traditional mortgage.
This is because you’re not borrowing money to purchase an existing home; instead, the bank is lending money based on your plans and your ability to repay the loan.
Additionally, construction loans can come with special perks like percentage rate locks which can protect you from rising interest rates during the lifespan of your loan.
Have Contingency Funds Available
No matter how well you plan, there’s always a chance that something will go wrong during the course of your project. That’s why it’s important to have contingency funds available so you can cover any unexpected costs that may come up.
Aim to set aside 10-20% of your total budget for contingencies.
Construction loans can be a great way to finance your new home. If you’re planning on breaking ground soon, make sure you understand how they work and what benefits they can offer before applying for one.
With careful planning and budgeting, a construction loan can help make your dream home a reality.
Image Credit: bulding a home soon by envato.com
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