Most face one of the main challenges when they will ever build their dream house: financing. One may rejoice because construction to permanent loans put together the construction loan and the permanent mortgage in one package. However, in spite of their great advantage, loans of this type carry several important considerations that borrowers might want to understand before borrowing one.
What Are Construction to Permanent Loans?
A construction to permanent loan is essentially a mortgage that enables homebuilders to finance the construction of their residence while rolling over into a permanent mortgage instead of taking out another separate loan. Instead of juggling multiple stages of financing, it combines the construction and permanent mortgage phases into one simple, convenient loan. When construction is done, the loan automatically converts to long-term mortgage.
Understanding the Loan Structure
A construction to permanent loan typically operates in two stages:
Construction Stage
During this stage, you borrow money to construct your house. The lending institutions make disbursements in draws, based on the stages of construction, such as completing the foundation, framing, and roofing.
Permanent Mortgage Phase
Once the house is completed, the loan becomes a permanent mortgage. It then rolls into a direct payment of principal and interest as any traditional mortgage would during its terms, 15 to 30 years in most cases.
Advantages of Construction-to-Permanent Loans
1. Single Loan, Single Application
The most important benefit of a construction to permanent loan is the saving of time. Whereby a short-term construction loan is applied for and then, when the house is completed, refinanced into a permanent mortgage, borrowers apply only once. This avoids paperwork, administrative costs, and time delays.
2. Potential Savings in Cost
A person has just one loan thus eliminating two distinct loans with different closing times, resulting in less total closing costs. Another favorable aspect is it due to lesser interest rates when compared with the short-time duration construction loan interest rates. Thus, construction to permanent loans significantly lessen up the loan costs.
3. Stability and Predictability
Because construction to permanent loans are non-adjustable rate loans, there is more stability with predictable monthly payments coming after the completion of a home. Predictability also remains an added attraction for the people who love having the pay schedule consistent without uncertainties due to adjusting rates.
Factors Worth Considering
Before finally taking a decision on whether a construction to permanent loan would suit your circumstances or not, remember the following factors:
1. Conditions of Approval Process
Construction-to-permanent loans are not easy to construct because lenders commonly add a higher level of approval than that of regular, traditional mortgages. Since this is a construction loan that funds the construction process, it is common for the lenders to review the credit of the borrower but also review certain specifics about the construction process, especially about the builder, his qualifications, budget, and timeline.
2. The Loan Dispensing Process
It disburses in tranches; therefore, you are not given all the advances at one time but pay for only what has been disbursed with the interest on it. Again, how these disbursements are carried out is key because, once the construction takes longer, so do your timelines and your finances.
3. After Construction Transition
While a construction to permanent loan streamlines the homebuilding process, sometimes, it does get complicated with changing over from construction to permanent mortgage. Permanent loan terms will have to fit in with long-term financial goals because everything is different now after the construction of the house is done—interest rates, payback time, and monthly payments.
Conclusion
There are also other advantages of a construction to permanent loan, like easier and less costly processing from construction to permanent financing and convenience. The challenge that may be encountered is the process, the disbursement structure, and the transition to a permanent mortgage. Knowing them will therefore help you decide if a construction to permanent loan is the right funding for building your new home.
