If you are looking to build a house from the ground up or in a new development, you will most likely need a loan for construction. These loans are typically shorter term loans with a maximum of one year and a variable rate that fluctuates with the prime rate.
Advantages of a Construction Loans
- It’s a loan that carries a higher interest rate which will increase during the life of the loan.
- During the life of the loan, you will be responsible for making the interest payments only.
- The moment the construction is complete you can immediately refinance this loan and receive a lower interest rate payment.
- Usually, lenders allow for an overrun period if construction goes beyond the expected completion date.
- It’s a good idea to include a late-completion penalty clause in your contract with your builder which obliges the builder to assume a larger part of the interest you accrue due to the overrun.
- An appraisal will be necessary to ensure the loan amount doesn’t exceed the property’s value. The fee for this appraisal can be rolled into the closing costs.