Construction loans are better options to borrow money for building homes

Building a new home poses a big problem to those who do not have sufficient money and does not know whom to approach in order to get loan. They may have a piece of land with them but just because they lack sufficient funds they have to wait to build their home. But that is no longer the case now as people can now opt for loans to construct their homes and pay it off once the construction is completed. There is a vast difference between a construction loan and a home loan. In a home loan, the borrower borrows money from the lender and pledges to pay it in equal monthly installments. Ideally, the time horizon is 30 years to repay the loan but some can even take the loan with a 15 years, 20 years or 25 years’ time horizon. However, as far as the construction loans are concerned you are required to pay the entire loan amount as soon as the construction for the home is completed which means you need to pay it off on an average of 12 months period.

Construction loans are more like credit cards where you borrow money for the purpose of constructing your home and once it is done you need to pay the entire amount. You also have a draw request that is submitted by the builder. You are only required to pay the interest on the “draw request” amount and once the work is done, you need to pay the entire amount at one go. Once the house is ready and it is time to repay the lender, you can mortgage the home to the same lender or to some other lender and payoff the initial loan. Please remember, the construction loan is very different from the mortgage loan that we all know about and hence the initial loan amount was called construction loan but once the house is built and you take another loan to pay-off the initial one, you go for a mortgage loan.

The interest rate of a construction loan is also different than your auto loan or for that matter your home loan. Here you have the ability to negotiate the interest rates with the lender and they can increase or decrease the interest rates based on several factors like the equity of the project, your credit rating, your income and your financial history. So in case you manage to have a good credit rating and are earning reasonably, you have a very good chance to negotiate the interest rates with the lender.

The best part about construction loan is that it provides you with the freedom to move on to some other lender who is ready to offer you mortgage loan at a much reasonable interest rate and by not charging a bomb on the closing costs and other expenses. This means that you need not stick to the same lender who has offered you the construction loan. It is just that you need to pay them off and get along with another lender.

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