December 06, 2001
By: Bev Dodd
Construction loan: Build your own home
Unless you are one of the few who build with cash, the construction loan is a necessity. The construction loan process can be a trying one, research your needs before you apply. We'll discuss this more below.
Before you start scouting for a piece of land or an available lot, find out what size construction loan you can qualify for and any restrictions or limitations you may have to abide by. With that information in hand, it's easier to find the land you need and make an offer. Never make any commitments to purchase and build or close escrow before you have solidified your financing needs.
It is typical for interest on a construction loan to be a few points higher than a permanent loan. But, you also want to become debt-free sooner, paying as little as possible in interest and other charges. You must therefore consider interest and charges over the life of the loan. A low introductory rate is of only limited benefit if you will be paying a higher rate for the next 10 years. Also, beware of advertisements claiming their loan is the best over the full 30 year period. Do you really think you will still have that loan in 30 years time?
A custom construction loan is a little more complex than a standard mortgage loan, but they don't have to be overwhelming. Most people prefer an all in one construction loan today a loan that allows for draws during the construction period and then rolls into the permanent financing once the home is complete. If the home is finished on time, many lenders will even refund some of their construction loan fee.
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