The construction loan is used primarily – if not exclusively – for funding the building or extensive renovation of residential property. Such a loan has the unique property of often being converted to mortgage loans once the property has been completed, to facilitate interest payments over the long term. This is because the standard construction loan is considered a short-term, holdover loan for the construction period.

Construction Loans: A Considerable Approval Process

More than any other kind of loan, construction loans require considerable planning. Not only must you first rectify paying for the construction or overhaul of the property. But you also have to plan to change the loan into a mortgage afterward and pay this altered financial vehicle off by other means. You will need to understand concepts such as the draw schedule, during which the financier sends a surveyor out to your property after every stage of construction, to ascertain the number of funds that need to be released for the next stage. Beneficially, you only pay interest on the construction loan – no principal payments until the mortgage conversion.

There Are Several Options When it Comes to Construction Loans

There are four basic kinds of a construction loan, giving you plenty of options from which to choose. The owner-builder loan type, for example, sends funds directly to your building contractor for purposes of expedience. It is solely for the construction of the home.

Another type is the construction-to-permanent loan. Which is the one mentioned at the start of the article as it is the most common. Once the building is completed, the loan converts to a mortgage. The primary feature of this is that during the building of the house, you paid only the interest on the principle. Afterward, you now become responsible for principal payments, as well. This necessitates taking out a mortgage.

The final two construction loans are the renovation loan and the construction-only loan. The names, themselves, explain every feature – there’s no crossover in terms of functional utility. To gauge which one is best for you, all that’s required is a business plan for the construction of your property. So that you can account for all the costs to come.

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