Building your own home (or garage, workshop or other structure) is great because you get exactly what you want. You have to make all the decisions about design, quality, budget and more.
One of the many decisions you’ll need to make is how to unlock a construction loan after the building is complete: will you use a one-time loan or two separate loans?
Construction loans, as the name suggests, are really just for buying land and building (or improving) structures.
They usually last no more than 12 months, so you need a way to move on to a long-term loan (especially if you want lower payments that will come with a 30-year mortgage).
When construction is complete, you will have to pay off a construction loan – and most people do this by replacing it with a loan that looks more like a standard 15 year or 30-year mortgage.
One-time construction loans allow you to get both loans (construction loan and permanent loan) at once. When construction is completed, your loan becomes a traditional mortgage (your lender may say convert, modify, or refinance). These loans are also called loans from construction to permanent loans.
Two Construction Loan Closures require you to get approval for two loans. A construction loan will fund your project, and then you will need to apply for (and obtain approval for) a permanent loan separately – once construction is complete.
Of course, you will want to know which is better, and of course, it depends on your situation. Some of the advantages and disadvantages of conversion credit are listed below.
The benefits of a single shutter
If you like one-stop shopping, you may be relying on a one-stop loan.
One app: A loan application can feel like an amazing research project.
With a single-payday loan, you have to go through the process once.
One close: More closures mean higher costs. However, the cost difference may not be dramatic (you have to pay a few costs – as a down payment after completion of construction – whether or not you use one or two credits), and you do not necessarily have to come out with a single closing.
No Payments: With some lenders, interest costs during the construction phase can be added to your permanent loan. This makes it easier for you to pay for housing while you wait for your new home to be built, but it also means you will owe more (and pay more interest) and make larger payments over the life of that new loan. In addition, delaying payments can be a sign that something is a little more prominent.
Security: Having ongoing funding – before you borrow to build – means you take less risk. If you lose your job during the construction phase, you will still receive permanent funding.
With double closing, it would be difficult to persuade a lender to approve your loan while you are in the business between jobs – and that could mean losing a home before you even live in it. Any number of things can go wrong during construction, much less worry if you have a loan obligation from the beginning.
Lock-in rate: Completing a permanent loan helps you plan for the future. You will know what your interest rate will be, so you can budget well for your monthly payments. You can also lock in the rate if you think rates will increase significantly during the construction phase (instead, crashes fall, some lenders allow you to adjust).
Advantages of multiple credits
Of course, there is no free lunch, so here are some downsides to building a one time loan.
Higher rates: One-time loans probably come with slightly higher rates (on a construction loan as well as a permanent loan), but you never know until you apply and compare offers. When you use one loan, you reduce the risk and enjoy the convenience of one closing; these benefits come at a cost.
Flexibility: When using a single loan, you will need to choose a prepackaged program (although you may find a lender that offers exactly what you want – some lenders offer their choice of one-time 15 years, 30 years, and ARM loans). Keeping your permanent loan separate means that you go out and apply anywhere you want, for any type of loan.
No plans to build
If you don’t know if or when you will build, but want to buy land, credit may be a better option. However, it is usually easier to borrow when you have plans to add to your property in the near future. Purchasing raw land presents the biggest challenges, while it is almost much easier to get approved.