Most of us are familiar with the kind of loan we get from a lender to finance the purchase of our home. After the down payment, we pay a sum each month toward the mortgage. This is the case with existing houses that we purchase. But what happens If you’re building a home? You could do a construction-only loan, which usually matures in a year or less. But that isn’t practical. What is practical is a construction-to-permanent loan, which streamlines this process.
Understanding the construction-to-permanent loan
The construction-to-permanent loan is easy to understand. It gives you the funds you need to build your home and then converts that loan into your mortgage.
The loan will cover construction costs, along with the purchase of the lot (if you don’t already own it). It can also include the costs for features like a pool and sea wall.
After construction is complete, that’s when you will start to make principal payments on the loan. Typically, that loan will be for a term of 15 to 30 years, and you will have a choice for a fixed rate or adjustable-rate mortgage (ARM).
How the loan process works
During the construction process, your builder will submit “draw requests” to the bank which are invoices for completed work. Each payment from the bank to your builder will “draw down” on the amount of your loan. As your home is being built, the lender will send an inspector to make sure the home is being progressing as planned and to their satisfaction.
After your home is complete, the bank then wraps that loan into a traditional mortgage. The advantage of this type of loan is that you just have one set of closing costs and you can lock in a low rate up front. Other benefits of the process:
- You make interest-only payments on the loan during construction on what you have borrowed each month.
- The builder requests payment from the lender, not you.
Let LaBram Homes answer your loan questions
Need guidance with the construction-to-permanent loan process? We are the Tampa Bay area’s leading custom home builder, and we are happy to help put you in touch with the right banker who specializes in construction-to-permanent loans. Contact us and let’s get started on a plan for creating and financing your new home.
