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Understanding What Goes Into A Construction Mortgage

Understanding What Goes Into A Construction Mortgage

Understanding what goes into a construction mortgage will be extremely important

if they are comes a time that one is going to have a home built from the ground up and on land that is either bought or already owned. This type of mortgage can come in really handy when financing such construction and land purchases as may be necessary, there are a number of steps and features that should be examined.

To begin with, a typical construction mortgage is of short duration. Known as a short-term mortgage, it usually runs no more than three years. It is a form of real estate financing and is secured by a mortgage on the home or property being financed. It is specifically meant to cover various costs, which usually revolve around the cost to develop the land and to build the structure.

It is an excellent way to build on land or build or renovate a home that already exists before moving into it. This sort of mortgage can make sense for those who are "cash poor" and do not have large sums of money to put towards the construction of a home built from the ground up. These kinds of mortgages allow a borrower to obtain a significant portion of the total cost of the construction project.

Much better rates are available on these mortgages in the case where a person has need of a relatively small amount of funding in order to engage in improvements to a home prior to obtaining a certificate of occupancy from the local municipality, also. There are several different variations of this kind of mortgage, with a common one known as "construction to permanent loan" financing.Understanding What Goes Into A Construction Mortgage

It can make for an excellent way to avoid paying double closing costs -- because you will only be paying closing costs one time -- and the construction loan will become a traditional mortgage once construction has been completed and a certificate of occupancy obtained. This sort of loan also allows the borrower to lock in a permanent rate at the beginning of construction.

This last feature is particularly outstanding, as there have been many persons who have obtained these kinds of mortgages who have later been able to avoid a significant increase in the mortgage interest rate when the construction was completed. More traditional forms of this mortgage, carried out in two stages, would see the new mortgage being executed at a significantly higher rate.

One thing to keep in mind with a construction mortgage regardless of the type is that the contractor building the home, the borrower and the lender will need to make arrangements for a payment schedule that will be effective and mutually beneficial to all three parties. Usually, this loan is dispersed as each stage in the construction has been completed. Still, make sure of when payments are due.

In almost every case, it makes financial sense to keep all mortgage activity with the same lender. In other words, try to avoid taking out a loan for construction from one lender and then a separate long-term mortgage from another lender because each will charge you fees that can add up to a significant amount. A construction mortgage makes for an excellent way to get a home built from scratch.

by: Adriana Noton
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