What are construction loans?

A construction loan is a special type of loan to pay for the construction of either a home or business generally on a property that you already own. The source of a construction loan can vary and just like any other loan, shopping around can result in a better deal for you.

The most common place to obtain a construction loan is from the Construction Company itself. Most construction companies, just like car dealers, will have a few lending options available for you. However, if you are willing to do a little work yourself, you may be able to find better interest rates and terms from another source, such as your bank.

As is true with any type of loan, it is important to read the fine print in your contract before agreeing to the terms. There are several types of construction loans available, and the one being presented may not be the best one for you. Also, there may be hidden fees or closing costs that you did not expect.

One of the biggest variables with construction loans is the length of the term. You will have the option of either a construction only loan or a total construction loan. A construction only loan is a loan with a very short period of time, usually one year. All construction must be completed within this time period or there may be penalties. After the construction is complete you must close that loan and secure another loan to repay the debt. The other type of loan typically has a term of anything from 10 years to 30 years. With this type of loan you will save some money in closing costs but you may pay more in interest.

When deciding the length of the term for your construction loan, you will want to factor in your total debt load. During the building of your home you may find many extra expenses that you did not expect. Carefully consider your potential debt load, especially if you currently have a mortgage to pay for the property. You may wish to consider an interest only loan agreement for the duration of the project. Instead of paying a set monthly amount to reduce the amount owed, you only pay interest on the amount of money that has actually been paid out until the project is complete.

Apply for a construction loan can be a little different from applying for a normal loan. Of course the usual factors will apply, your credit history, income and stability. However, other factors come into play with a construction loan such as if you own the property you intend to build on. An interesting thing to note is that how well informed you are about the building process and how well organized you have it may reduce the amount of interest that you have to pay. Being well organized and informed means you are more likely to complete your project on time and on budget and thus are less of a risk to a lender.

A construction loan is an excellent tool if you already own property however you must look around to ensure that you are getting the best deal. There are several types of construction loans and each one is a little different. These minor differences can mean a lot to you in the form of extra costs of higher interest rates. While planning your construction project be sure to also research and plan your funding options before proceeding.