If you're like most people, you won't be able to fully pay to build a custom home upfront. Just like purchasing a home that has already been built, you'll likely want to take out a loan to fund your purchase. To build your custom home you're going to need a construction loan. These types of loans function similarly to traditional mortgages, but the two are not the same. Here's what you need to know about the differences between them, along with tips for getting a construction loan. Contact us to learn more.
Let's start with the similarities. Both loan types are used to purchase homes, and you'll have the option of choosing between fixed and adjustable-rate interest. You'll generally have a payment term of 30 years, though it is smart to get a shorter loan period if you can afford the payments. This will allow you to save the most money on interest over the life of your loan.
In general, though, construction loans tend to come with higher interest rates than traditional mortgages do. This is because a loan for working with custom home builders comes with greater risk for the lender than a loan for a home that already exists does. For the same reason, you'll need to come to loan negotiations with a down payment of at least 10%. Some construction loan lenders will require you to start with an even higher contribution to minimize the risk that you will walk away from the project.
Mortgages and construction loans also differ in the way they are paid out and when you start making your payments. With a traditional mortgage, you'll get the entire sum at once, and you'll start making payments on your loan right away. For a construction loan, on the other hand, the funds will typically be paid out to your custom home builder in installments as the project progresses. During the construction phase, you'll typically only have to pay back the interest that accrues on your loan. Once you take possession of your new home, you'll start paying down the principal balance as well.
Once construction is complete on your custom home, you may wish to refinance your construction loan into a traditional mortgage. This can help you get a lower interest rate, which can save you a lot of money throughout your loan term.
As with a mortgage, you'll need to apply and get approved for a construction loan. Be sure to work out your budget in advance so that you know what you can afford in terms of monthly payments. In general, you'll want your loan to cover the full cost of construction, as well as a cushion for any modifications you make or complications that arise. Your custom home builder should provide you with a detailed breakdown of the costs involved, as well as the completion timeline for your new home build. You will need this document to provide to your lender.
Our team will be happy to help you not only work out design details but guide you in obtaining funding for your new home. Get started with our custom home builders today. Call us now for a free consultation.