7 Benefits Of A Construction To Perm Loan
Building a home can be a complicated process. First, you must purchase a plot of land on which to build the home, make building plans, and apply for a loan to cover the construction. Once the home has been built, a second loan will be needed for the mortgage on the finished home. However, many borrowers are saving significant time and money by using a construction-to-permanent-loan, a single loan option that streamlines the financing process into a single loan and closing transaction. Although there may be a higher interest rate attached to this type of loan or the lender may require a bigger down payment, there are several reasons that borrowers may find a construction-to-permanent loan to be the best solution. Here is a look at the benefits of this type of financing.
There Is Only One Closing
One of the biggest advantages of a construction-to-permanent loan over getting a construction-only loan is the fact that there will only be one closing. In many other construction loan scenarios, it will be necessary to first obtain a construction loan and then secure a mortgage once the home’s construction has been completed. This requires significantly more paperwork, not to mention additional time and stress. Another benefit of having one closing instead of two is lower closing costs. The closing costs on loans can be very expensive, and the amount of money that can be saved on this aspect alone by opting for one loan instead of two can be significant.
You May Be Able To Lock In A Favorable Interest Rate
Another advantage of a construction-to-permanent loan is that it can sometimes give borrowers the chance to lock in a particularly good interest rate very early in the process. If interest rates are especially favorable at the time that construction begins and there are concerns that the rate will go up in the next few months, a construction-to-permanent loan allows the borrower to lock in the current interest rate. This can amount to significant savings over the life of the mortgage, which may be 30 years or longer.
It Can Help You Plan For The Future
When a borrower is able to finalize their permanent loan from the very beginning of the construction project, it makes it easier to plan for the future. They will already know what their interest rate will be, which makes it easy to calculate and budget for their monthly payments in advance.
Only Interest Is Charged During The Construction Phase
A construction-to-permanent loan works in a similar manner to a line of credit in the sense that borrowers are only allowed to draw the exact amount of money they need to pay the builder, and only at the times when those payment installments are due. During the construction phase, which may last as long as 18 months, only interest is charged on the amount that the borrower has drawn. This means the payments will be lower during this time than they would be if the borrower had taken out a different type of loan. This approach can be particularly attractive in cases where construction takes longer than expected.
There Is No Need To Pay For A Home That You Are Not Living In
With a construction-to-permanent loan, borrowers are not expected to make full mortgage payments until their home has been completed. For many people, it would be a significant financial burden to make a large payment on a new home while continuing to pay rent in the home where they are currently living. This type of loan can keep borrowers’ monthly costs down during construction.
It May Be Possible To Defer Payments
In most cases, borrowers will pay interest-only payments during the construction phase on a construction-to-permanent loan. However, some lenders may allow borrowers to add the interest incurred during the construction phase to their permanent loan in certain cases. Although this may cause them to end up owing more money and paying more interest and higher payments in the long term, it can be useful for those who would struggle to cover these interest-only payments during the construction phase.
It Provides Borrowers With Security
Securing permanent financing before beginning construction can reduce risks for the borrower. For example, if a borrower obtains a construction-only loan and then loses their job during the construction phase, they may not be able to get their mortgage approved once the construction loan has closed, which means they could lose their home before they ever move in.
Find Out More From Woodsboro Bank
A construction-to-permanent loan can be a great option for those who wish to build the home of their dreams. To learn more about all the financing options available to borrowers looking to build, get in touch with the loan experts at Woodsboro Bank.