Construction Loan Mortgage
Construction mortgage loans generally have longer terms than conventional mortgage loans. Along with longer terms construction mortgage loans also have more stringent terms. Most construction mortgage loan companies require extensive construction plans from the borrower as a precondition for extending a construction mortgage loan. Construction mortgage loans usually require the borrower to pay interest (only) till the time the construction is in progress. End of construction of a house is usually marketed by issuance of a certificate of tenancy. Construction mortgage loans are different from conventional mortgages in that they do not charge a fixed or adjustable interest rate tied to the prime rate lending rate. Rather the construction mortgage loan company establishes a timetable marking the completion of various stages of construction with input from the contractor. Interest is charged only on the amount disbursed at a certain point in time and not on whole loan amount. Most homeowners prefer to change their construction mortgage loan to a conventional mortgage loan after issuance of the certificate of tenancy. You can also opt for the purchase rate lock agreement applicable during completion of construction depending on the current trend of interest rates. Be certain to provide a time lag for unavoidable delays in construction.
Contrary to the popular belief construction mortgage loans are usually extended for shorter durations than conventional mortgages. The most common terms of construction mortgage loans are six months and one year. As mentioned above, you also have the option of converting your construction mortgage loan to a conventional mortgage loan. Another option is paying back your construction mortgage loan by taking a conventional mortgage loan. Contractors are paid by the construction mortgage loan after reviewing completion of various stages of construction. Most construction mortgage loan companies play an integral role in the construction process from beginning to end. You would most likely have to pay a higher interest rate if you are planning to take the construction mortgage loan for permanent financing. Even after conversion construction mortgage loans are tightly knit in to the converted conventional mortgage loan on the property. Borrowers are required to submit a different application for the conventional home mortgage that has to be accepted before applying for the construction mortgage loan. Construction mortgage loan and conventional home mortgage are jointly called as construction loan or a building loan. The most important advantage of a construction loan is reduced closing costs and a simpler application sanction process.
New home construction mortgage loans are distinct from construction mortgage loans and are taken to purchase existing houses. Such loans require the home in question to be pledged as a security against the amount extended. In case of default the bank or mortgage company will take ownership of the house and sell it to recover the loaned amount. A construction mortgage loan has features similar to conventional mortgage loans offered by banks and financial institutions. As mentioned above a construction mortgage loan can be converted to a conventional mortgage loan after the construction phase has been completed. A construction mortgage loan works in the following manner; either you or your builder applies for loan to finance the construction of your new house. As the construction precedes you withdraw funds from the construction mortgage loan account to pay for labor, materials and other construction costs. You are then required to present receipts to the bank or the construction mortgage loan company for different subcontractor labor and material construction charges. The bank or construction mortgage loan company would then evaluate these charges and issue payments to the subcontractors and home supply centers.
In case of new home construction mortgage loan there is no house to be pledged as security against the construction mortgage loan as the house is to be built as yet. In such cases the bank or construction mortgage loan company trust your word as assurance for the payment of the loan amount. Financing process of the construction of a new house is more cumbersome than it is for conventional mortgage loans. As mentioned above when the lender agrees to provide you with the construction mortgage loan for building a new house he generally requires a timetable for you or the contractor. This timetable states approximate deadlines of the completion of different phases of the construction of your home. New home construction mortgage loans are usually paid out in increments of 25 percent. Most construction mortgage lenders evaluate the finished house or various phases to ensure that the said construction is actually completed before paying out a chunk of the loan amount.
No payments on your new house construction mortgage loan would be made until the construction has been completed. At this point only interest payments would be owed on the loan. An advantage of this approach is that you have to pay interest only on the portion of the loan that is utilized. As the construction of your house moves on more loan amount is available for use. The balance of your new home construction mortgage loan would be owed only after the construction is completed. After completion of construction of your new home you have the option to either continue the construction mortgage loan or convert it to a conventional mortgage loan. However you are required to get the conversion approved from the mortgage lender before starting construction of a new home. On the completion of construction the mortgage is used to pay back the balance of the new home construction mortgage loan. Customers have a choice between a one or two time to close new home construction mortgage loan. The main difference between these two types of construction mortgage loans is the time of locking in the interest rate. When one time closing construction mortgage loan is chosen both the construction mortgage loan and the mortgage closes at similar time at which the interest rate is locked it. In two-time construction mortgage loan the construction mortgage loan closes before the mortgage close instruction is completed.