If you’re thinking about taking out a mortgage for a construction project, it’s important to understand how this type of financing will be different from the mortgage you may have on your home. Here, Michael Stortini explains what you need to know about financing your construction project.
Time
Typically, a construction loan is a short-term type of financing. Construction loans are typically short-term financing projects and take less than 12 months to complete. Standard mortgages take much longer to complete–usually between 15 and 30 years.
Payments
When you take out a construction loan to finance your project, you’ll only pay interest while the construction is still happening. With a mortgage on your home, you’ll pay toward both the principal and interest of the loan right away.
Interest Rates
Construction loans are riskier for lending companies than conventional mortgage loans, which means that construction loans tend to have higher interest rates.
How Does a Construction Loan Work?
Just like a standard mortgage, you’ll need to submit certain documents to your lender in order to assess whether you qualify for a construction loan. Michael Stortini says you’ll find that much of the process is the same as applying for a standard mortgage.
Your construction loan can be used for many aspects of building your home, including the permits required by your local government, materials, labor, and the land on which you’ll build your home. Your funds from your construction loan will be dispersed in phases as you move through different parts of the construction process. An appraiser will check in on your progress as you move through the project in order to approve the disbursement of your funds.
After you complete the construction of your new home, your lender will work with you to convert your construction loan to a standard mortgage. The money that you owe from the construction of your house will be transferred. Instead of just making interest payments as you did during the construction process, you’ll begin to make payments on your home that include both principal and interest, according to Michael Stortini.