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What is a construction loan?
A construction loan is a short-term loan that specifically covers the expenditures of constructing a custom house. This is not a mortgage and is classified as specialty finance.
How do construction loans work?
- The borrower applies for a construction loan by providing financial documents, project blueprints, and schedules.
- Upon approval, the borrower begins to withdraw cash concurrently with each phase of the project, often paying just interest throughout development. During construction, an appraiser or inspector evaluates the structure to allow more funding.
- Upon completion of construction, the borrower often converts the construction loan to a permanent mortgage and starts making principal and interest payments.
Construction loans often feature variable interest rates that fluctuate with the prime rate. Typically, construction loan rates are higher than conventional mortgage loan rates. Your house serves as security for a conventional mortgage; if you fail on your payments, the lender may confiscate your home. The lender does not have this choice with a home construction loan, thus they tend to see these loans as higher risk. The typical interest rate on a construction loan will be around 1 percentage point more than a conventional mortgage rate, ranging between 5 and 10 percent.
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Roberto Martinez can assist you with your construction loan. Our construction home loan programs are designed to help you build and finance the home of your dreams without breaking the bank and assist you all throughout the process.