Building a new property usually comes with great anticipation. However, financing is one of the greatest worries that every property developer has to deal with when planning new constructions. Check out the following tips on how to finance a new construction project.
Construction Loans for New Home Financing
A construction loan is the best option to consider when seeking financing for a new home. As it suggests, the short term loan is issued to cover the costs of new constructions. In case your application is approved, you will be able to withdraw a set amount of money during the construction process. And, the financial provider will only charge monthly interests based on the amount of money that you withdraw for the new construction.
Types of Construction Loans
There are two main types of construction loans that you can choose from to build a new property including one-time close and two-time close loans.
One-Time Close Loans
This type of loan integrates both a construction loan and a traditional mortgage. When getting the loan, the provider will set a maximum mortgage rate. After the end of the construction, the loan is converted into a long-term mortgage. The new disbursement is used to pay off the balances from the first loan then; you now begin re-paying the mortgage.
Two-Time Close Loans
The other alternative is a two-time close loan that is also offered in two parts; a construction loan and standard mortgage. However, you will have to re-finance the mortgage upon the completion of the construction. That means, you have to apply again for the mortgage for approval and pay closing costs.
Each of these types of construction loans have unique pros and cons that you should carefully look into before applying. Besides, it is also important to keep in mind that financial institutions often approve financing for 75% to 80% of the appraised value. The owners of the property will need to shoulder the rest. Nevertheless, a construction loan is the most convenient and risk-free option for financing a new construction project.