If you’re planning on building a new home instead of buying one, you’ll have to finance your construction project differently. While traditional home loans are used to finance existing properties, a construction loan is used to finance custom home building.
These loans can be used to cover various parts of the construction process, including the land and building materials, as well as any contractor labor and permits. Depending on your needs and finances, there are different types of construction financing options available, ranging from standalone construction loans to construction-to-permit loans.
Construction loans are short-term loans used to build a new home. They typically last only a year or less, which is about the time it would take to finish the project. Once the house is built, individuals will need to get a mortgage separately or see if they could potentially convert the construction loan into a mortgage.
These loans, which are considered specialty financing, are different than traditional loans in several different ways. Instead of a lump-sum payment, the funds are distributed in stages throughout the construction process. You’ll typically make interest-only payments until the construction is completed.
Because construction loans are considered unsecured since they aren’t backed by an asset, they are seen as more risky to lenders. In other words, a lender doesn’t have access to any collateral if an individual defaults on their payment. This is why you can typically expect tougher criteria to qualify for one.
Interest rates can tend to fluctuate with the prime rate. These variable interest rates are different than traditional loans, which have fixed rates, making it easy to expect what your monthly payment will be. Overall, you can expect a construction loan to have a higher interest rate than traditional mortgage rates.
At Presence Bank, we are committed to providing the banking services you need to prosper. Because we understand that every individual and business is unique, we take the time to personally get to know you and learn more about your needs. This allows us to provide a more personalized approach that takes your lifestyle and goals into consideration.
In everything we do, we are committed to being a partner. With honest and open communication, you can expect transparency every step of the way. We also understand that there’s a lot going on throughout the homebuilding process, which is why we’ve made banking easier than ever. We offer secure mobile banking with our Mobile Deposit app so you can easily access your account.
