Construction Loans: Pros and Cons

A home construction loan is a short-term loan used to build a property. The term usually lasts up to two years and helps cover labor costs, building permit costs, land costs, building material costs, septic/well costs, and more. You may use construction loans to build a new home. You are free to select the builder and upgrades according to your choice that are not present in your current home.

This short guide will help you learn about the pros and cons of construction loans. 

What Are The Pros Of Construction Loans?

Customized Floor Plan: One of the pros of a construction loan for a house is that it allows you to customize the floor plan. With a customized floor plan you can achieve your dream home as per your preferences and lifestyle objectives. 

Material Choice: You are free to choose the materials for interior and exterior spaces. This ensures quality construction and low maintenance with warranty-backed appliances, HVAC units, new roofs, and floors.

Interest-only payments: Another good aspect is that construction loans comes with “interest only” payment option during the construction phase, depending on the cumulative balance of funds disbursed, rather than the total price of the contract. This keeps early payments low. 

Potential Rate Decline: Another benefit is that the construction loan rate can decrease after the construction is finished. This is possible only when the rates have improved since the construction started. To lower the closing costs, it is best to take a loan from a lender with one closing instead of two closings.

What are the disadvantages of a construction loan?

Early Payments: The negative side of a home construction loan is that once the builder disburses the funds, your payments begin. 

Higher rates of interest: Construction loan interest rates are usually higher than traditional mortgage rates. 

Higher closing costs: Expect the closing costs to be costlier than traditional mortgages because of required inspections and other construction-related expenses.

Potential Delays and Cost Overruns: During new home construction, there are some potential causes of risks in delays in materials and upgrades. In certain cases, the construction material can be delayed by 18 to 20 weeks. In many other cases, the overall project can go over budget by $100,000 or more. Fortunately, the borrowers had sufficient equity in the property and qualified for a larger loan amount.

Extended appraisal: In many cases, the appraisal can take a lot more time, so much so that by the time the documents get signed at settlement, the estimates have increased by almost twice the price. 

What Real Estate Experts Advise? 

The disadvantage of construction projects is characterized by frequent delays, affecting the permanent timing of the construction loan rate. There could be unexpected contingencies and certain last-minute changes.  

Experts advise having a 5% contingency in the contract to tackle and address cost and time overruns. It can also be added to the amount if it cannot be built into the contract because the builder is not keen to add it.

Also, if there is a builder’s incentive, it is actually part of the construction price —so, as a buyer, you bear the cost.

Since not all lenders offer construction loans, it is best to speak with a financial professional and get the help of experts to choose the right product with the best construction loan rate.

Get The Perfect Construction Loan Interest Rate at Total Mortgage

A construction loan helps you build & customize your dream house or renovate an existing one. However, to get approved, you must closely consider your lender’s requirements for a home construction loan.

Get expert’s advice for successful approvals for construction loans for houses. Contact Total Mortgage for thorough assistance.