The process of building a dream home is a very exciting time for homeowners, but it can also be a little daunting with all the choices and decisions that need to be made. One of the most important decisions in the process will be how to finance the construction. In residential financing there are two primary financing options: a standard construction loan, and one-time close, construction-topermanent loan.
Standard construction loans are short term loans, normally 9 to 15 months in duration. These loans are a line of credit for the homeowner which is funded gradually as the property is being built. When the line is fully funded and the property is complete, the homeowner will need to pay off the line, which could mean refinancing it into a longterm permanent mortgage or paying it off with other funds. The primary advantage with these loans is that the borrower is not committed to a long-term mortgage and has some flexibility when deciding how to finance the completed property.
The second option is a one-time close, construction-to-permanent (C to P) loan. In this scenario the client still gets a credit line which is drawn to finance the construction, but the line will automatically convert to a permanent mortgage when the construction is complete. In this case the borrower will choose their permanent financing loan upfront before the construction is started. The big advantage of C to P loans is that the client can lock in their final rate before construction begins and there may be fewer closing costs overall.
One of the best decisions homeowners can make is to consult with a local construction lending specialist to discuss their options and really understand the construction financing process before they start.
