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Construction Mortgage Loans

Building your dream home is a reality that many men and women reach every year.  Construction mortgage loans are treated differently to traditional mortgages because the money must be distributed at intervals as the home is being built.

A lender will want to see blueprints before any work begins.  They need to make sure the home being built is not inflated in price.  With a typical construction, money is disbursed at different times.

Stages of a Typical Construction:

  • Perc tests must be made to ensure the land is suitable for building.
  • Payment is made to buy the land.
  • Workers must be hired to clear the land.
  • The hole must be dug for the foundation and footings.
  • Concrete is poured and allowed to properly set.
  • First level flooring is placed and then walls are framed.
  • Insulation is placed within outside walls.
  • Bathtubs are placed, especially in small bathrooms.
  • Roof trusses are place and roof is covered with plywood.
  • Windows and doors are installed.
  • Siding and roof are finished.
  • Decks or patios are built.
  • Electrical system is installed.
  • Indoor plumbing and heating systems are installed.
  • Sheetrock is placed.
  • Painting or wallpapering is completed.
  • Appliances are installed.
  • Flooring is installed.
  • Finishing touches are made.

Because the builders need money throughout the building process to purchase supplies and pay their wages, a bank will grant access to some funding throughout each stage.  Builders must keep the borrower and the borrower's bank up to date on the status of the construction.  Often the banks will require homeowners to make interest only payments on the construction mortgage as the home is being built.  For the construction process, the mortgage is usually an interest-only mortgage with an adjustable rate.  This does not mean you are stuck with this program.

Once the home is built, the mortgage changes to a standard mortgage and payments are made as scheduled covering both the interest and principal.  By setting up a construction loan this way, borrowers are able to avoid two loans – one for construction costs and the other for the actual home purchase.

Construction loans come in a number of options:

  • Adjustable rate mortgages:  Adjustable rate mortgages start with an extremely low interest rate and then are adjusted to match the prime rate plus a pre-selected percentage throughout the life of the mortgage.  ARMs can be a gamble.  If rates rise, your mortgage payment will rise, sometimes to a level you might not be able to afford.  If they drop, you'll wind up with more money in your pocket every month.
  • 15, 20, 30 or 40 year fixed rate mortgages:  Fixed rate mortgages have you lock-in with an interest rate at the time of closing or before closing in many states.  You will know exactly what your mortgage payment will be from the very start, and it will never change.  If rates drop lower than your locked-in interest rate, you will see no benefit unless you refinance to a lower rate.  Refinancing can be costly because of the second round of closing fees and origination points.

With a construction loan, builders have a set period of time to complete the construction process, usually one year.  If construction runs over, this can lead to problems for the borrower, so it is important to keep up to date on the construction process to prevent yourself with future hassles. Alternate small business lenders exist for small business those looking for alternative financing from non banking institions.

Regardless of the type of product you choose, your construction mortgage will cover the land, the cost of the supplies and the building costs.  Your mortgage payment is set to cover the building costs and then when the home is finished the amount resets to cover the full purchase price.

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