A construction mortgage is a type of financing that is used for the building of a new home.
The Construction Loan is typically approved before the building of the subject home starts and increments of the loan are being extended during the home building phase and while the building progresses.
Solution:
A construction mortgage is a type of financing used for building a new home. The construction loan is typically approved before the home-building process begins, and portions of the loan are disbursed incrementally as construction progresses.
During the construction phase, only interest payments are required. Once construction is complete, the loan amount becomes due. However, many construction mortgages automatically convert into standard mortgages, known as One-Time Close Loans. The advantage of a One-Time Close loan is that borrowers only apply for the loan once and have a single closing process.
If the construction loan is not originated as a One-Time Close loan, it can be refinanced into a permanent loan with a fixed interest rate once the property is completed.
Borrowers who do not take out a construction-to-permanent loan may opt for a stand-alone construction loan. These loans typically have a maximum term of one year during the construction period and may require a smaller down payment. However, the interest rate on a stand-alone construction loan cannot be locked, and rates may be higher than those on a construction-to-permanent loan.
Because building a new home is riskier than purchasing an existing residence, construction mortgages can be more challenging to get approved. These mortgages often carry higher interest rates than traditional home loans. That said, many of our lending partners specialize in construction loans, and we provide guidance to borrowers throughout the loan approval process.
The Construction Mortgage only requires payment of interest during the construction period. When the building phase is over, the Construction Loan amount becomes due and payable. However, customarily Construction Mortgages can either automatically roll over into Standard Mortgages as they could have been created as the so-called One-Time Close Loans. The advantage of a One-Time-Close loan is that Borrowers apply for a loan only once, and will have one loan closing only.
If the Construction Loan has not been originated as a One-Time Close Loan, it can be refinanced into a so-called Permanent Loan with fixed interest rate after the property has been completed
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