How Construction Loans Work
People are always interested in how construction loans work. They want to know what the construction is for, and when you tell them it is to build a home, then they begin to wonder what a home mortgage loan is used for. People get quite perplexed about home financing, and many do not know what all of the options are that they can use to get a home built to their exact specifications.
Three entities are involved in a construction loan, and they determine how construction loans work. Those entities are the prospective homeowner, the contractor that will be building the home and the banking institution that will provide financing for the construction loan, and the permanent home loan after the home has been built.
To allow the bank to share their feelings on how construction loans work, they will have to get a good idea about how the home will look after it is built, how much it will cost them, and they will have to know what the time line is on finishing the home.
With this information, they will be able to tell the prospective homeowner whether they can loan him all of the money he needs to build the home, or if they need to reduce the amount to meet their loan amount guidelines set by their shareholders. The home contractor can give the bank the time line they need to make their financing arrangements.
The prospective homeowner must find out how construction loans work because he must tell the contractor when to start building. If the prospective homeowner is in agreement with the bank about the variable interest rate associated with his construction loan, then he can tell the contractor to withdraw a certain amount of monies to use in the first phase of the home building plan.
The prospective homeowner will also know how construction loans work because he will monitor it every step of the way. He will authorize funds for the second and subsequent phases of construction and keep apprised of when the building is ready to be occupied. He will know how construction loans work because he lived it.
The prospective homeowner knows how construction loans work because he is the one who made regular payments on the construction loan while his home was being built. He realizes fully that his construction loan payments were for interest only on the loan amount, and that the amount that is left over at the end of the construction, must be repaid or refinanced.
The prospective homeowner knows that the amount he will owe at the end of the construction, can be incorporated into a home mortgage loan that will have a far better interest rate than what he has been paying for the money that he borrowed in his construction loan he obtained to build his home.
by Melissa.Brown 19 years ago