The excitement of having a home built for you is tempered by the unfamiliarity of the financing. Here are the basics of home construction loans for when you’re ready to get a mortgage for building your next home in the Memphis area.
- Construction-to-Permanent: You borrow to pay for construction. When you move in, the lender converts the loan balance into a permanent mortgage. It’s two loans in one.
- Stand-Alone Construction: Your first loan pays for construction. When it’s time to move in, you get a mortgage to pay off the construction debt. It’s two separate loans.
Construction to Permanent Loans
You close the loan only once with a construction-to-permanent loan, which reduces the fees you pay. During the construction phase, you pay interest only on the outstanding balance. The interest rate is variable during construction, moving up and down with the prime rate. So if the Federal Reserve raises or decreases short-term interest rates while the house is being built, your interest rate will change, too.
Stand Alone Loan
A stand-alone construction loan could be worthwhile if it allows a smaller down payment. That can be a major advantage if you already own a home and you don’t have much cash now for a down payment, but you will have more cash after you sell your home. You can live in your current home while your next home is under construction. This type of loan has drawbacks. For one, you pay for two closings and two sets of fees: First, on the construction loan; second, on the permanent mortgage.
Why is there so little information or competing lender offers on construction loans online? For starters, these loans represent only a very small percentage of home loans. Plus, they’re a bigger risk. Hence, such financing isn’t the type of thing lenders aggressively market online; you have to hit the streets for it. Regional banks and credit unions are typically the best sources.
Choose the Best Builder
An important aspect of building your home is choosing the right builder. Find one that has built the kind of house you want in terms of price, style and size. Look into the builder’s credentials with the local homebuilders association and ask for references from previous clients. You could also see if there are any complaints against the builder with the Better Business Bureau. Typically, your lender will look into the builder’s credit standing, financial situation and licenses, as well as the track record for building similar homes before you get a mortgage.
MH Akers offers quality custom home construction services and has a strong relationship with lenders in the greater Memphis area. Learn more today!