Construction Loans
New construction loans are asset-backed loans collateralized by real estate. Construction loans often include funds for purchasing raw land as well as for building costs, which are paid out in periodic “draws” once the builder has met some pre-defined milestones. Due to the higher risk associated with these types of loans, the lender will generally require the borrower to contribute some of their own cash or equity to the deal. Additionally, borrowers will often have input into the project plans, particularly relating to the timelines and budgets.
Construction-to-permanent loans. These loans are good if you have definite construction plans and timelines in place. In this case, the bank pays the builder as the work is being completed. Then, that cost is converted to a mortgage at closing. This type of loan allows you to lock interest rates at closing, which makes for steady long-term payments.
Construction-only loans. Construction-only loans must be paid off in full once the building is complete. It’s a good choice if you have a large amount of cash to work with or you’re confident that the proceeds from the sale of a current property will cover another build.
Renovation construction loans. This type of loan is used if you’re buying a fixer upper. In this case, the projected cost of any renovations you plan on doing to the property is wrapped up in the mortgage, along with the purchase price. New construction loans are usually long-term loans aimed at spacing out the total cost to build or buy new construction units over a span of 5 to 25 years.
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