Posts Tagged ‘construction loan’

How Construction Loans Work

The simple definition of a construction loan is a loan used to build a home. A construction loan is very different from a typical mortgage loan. A construction loan may sometimes be more difficult to acquire than a traditional home loan, because there isn’t anything to be used as collateral for the loan. This in turn usually also means slightly higher interest rates on a construction loan.

Construction loans still offer different loan types as well as different financing terms. Typical construction loans include the 30 year fixed, 15 year fixed, 1 year ARM, 3/1 ARM, 5/1 ARM, 7/1 ARM, 10/1 ARM and interest-only loans. You can also get a short term loan usually one year while the house is under construction and then refinance into a lower interest rate term once construction is complete. This however requires two loan closing, in turn costing you two sets of closing costs. A more popular construction loan today is known as a construction to permanent loan. This type of loan only charges you 1 set of closing costs.

Before you get a construction loan you will have to get pre-qualified for the loan just like you would a regular mortgage loan. Also, just like a typical mortgage the better your FICO score and the more equity you have in the land you are building your home on will determine what type of interest rates and how much you can borrow.

Another thing to understand about construction loans is that you have to start making payments on the loan before your house is completed. This can be done by simply making the monthly payment or by setting up an interest reserve fund. An interest reserve fund basically pays your monthly payment for you while your land is being built. It’s not a free service however, this amount is added back into the loan. Basically the bank estimates how much your interest will be over a year and adds that amount onto the loan. This does however help the consumer if they are paying rent or another house payment while their home is being buit.

Information about a bridge loan

A bridge loan is basically a short-term loan pending another loan in the near future. They are often used to close on a property in a short period of time, stop the process of forclosure on a property, or to fill an immediate need for financing to plan for long term financing.

A common use of a bridge loan among consumers is borrowing enough money to pay down on a new home before closing the sell on their current home. The profit from the sell of their old home will be used to pay off the bridge loan balance.

There are many cons of using a bridge loan because of the high risk to the lenders. Cons include much higher interest rates usually between 12% – 15%. There will also probably be more fees associated with a brige loan as well as points paid to close the loan. Typical term lengths on bridge loans are ususally less than 3 years.

Land Loan Mortgage Information

Land loans or land mortgages are designed for borrowers who are planning on building a home but aren’t ready right now. They are planning on building their own home in the near future and at that point will be looking for a construction loan.

Mortgages on Land loans are usually not as easy to obtain as a mortgage loan on a home. Usually interest rates are also slightly higher and financing terms are not as flexible. Many times interest rates will be 2% or 3% higher than a home mortgage interest rate and you won’t be able to get a 30 years fixed interest rate land mortgage. Many lenders will also require a down payment of at least 20%.

The reason for the restrictions is because the loans are much riskier for the lenders. The loan’s collateral, the vacant land, isn’t currently being used for anything. If you don’t have a house on the property you’re not as motivated to make the monthly payment. If the land gets foreclosed on you don’t really lose anything except what you’ve paid into the property.

The good concept of purchasing land is that the’re not making more of it. More than likely land will only appreciate in value as time passes. Purchasing land now may be the smartest investment you can make.