Construction Loan Information

by Asokan from Lawrence, Kansas, USA

Ask Kate: Construction Loan Information - What are the pros and cons? Hi Kate, Thank you for your valuable service to people like me, who have no knowledge about how the mortgage loan system works. We are seriously planning to build our new home.

When we talked to two different builders, they all recommend that, we should get the construction loan and that will be converted into mortgage loan. I thought the builder will get the loan, construct the home, will sell it to us.

Could you please, educate me the pros and cons of both. I would appreciate your reply. Thank you, Asokan

Kate Answers: Pros and Cons of Construction Loan Information

Ask Kate at
Hi Asokan,

You're in luck because I already have information for you at Residential Construction Loans - Long Term and Permanent Financing Explained.

This page explains the differences between short-term construction financing and all in one financing.

You asked about the pros and cons of the two types of mortgages. The biggest advantage to the builder obtaining the short-term construction financing is that the homeowner only has to originate a mortgage after the house is built.

Because construction is complete, the mortgage will have a lower interest rate than an all in one construction loan. But the interest rate generally cannot be locked in until the house is near completion.

The advantage to an all-in-one is that one mortgage, not two, covers the construction period AND the permanent financing. This means the home owner can lock in the mortgage rate early on in the process.

If the house is built during an especially volatile market, it is reassuring to know you don't have to wait six months before locking in.

Details to Compare in Construction Loan Financing

Construction Loan Financing Information
To compare construction loan information and see which is best for you, I recommend that you ask your lender for two good faith estimates and loan disclosures.

Compare interest rates and mortgage closing costs.

Ask when your mortgage rate lock will be available.

Find out if you can you get a 30 year fixed rate mortgage on either program.

I have also included links to pages on my website about forming a dream team whether you are buying or building a house. My home buying articles will give you an insider's view you won't find anywhere else!

Good luck and best wishes,

Ask Kate

Learn More About Your Dream Team

How to Buy a House Part 1 Meet your real estate agent and save yourself heartache and headache.

How to Buy a House Part 2 Meet your mortgage lender - Expect more than quoting the lowest rate or taking an application.

Check out List of Mortgage Companies, a local lender directory.

How to Get a Mortgage Part 3 Meet your home inspector and avoid buying a money pit.

How to Get a Mortgage Part 4 Meet your real estate appraiser - Does an appraisal assures you of a good deal?

How to Get a Mortgage Part 5 Meet your title insurance companies for coverage resulting in peace of mind.

How to Get a Mortgage Part 6 Meet your homeowners insurance agent because there is more to it than the cheapest quote.

How to Get a Mortgage Part 7 Meet your escrow and closing disclosure form, the guardian of your real estate transactions.

Title, Abstract Services and Escrow Agents, a mortgage service provider directory.

How to Buy a House Questions and Answers II.

How to Buy a House Questions and Answers I.

Return from Construction Loan Information to Get Your Best Mortgage Rate

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Comments for Construction Loan Information.

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All in One Construction Mortgage
by: Anonymous

I'm planning on building a 2500 square foot home in the coming months.

I am at the point of finding financing. I would like an all in one loan for 30 years that I would not have to refinance.

The home will be built in Northern California. I'm looking for a 80% loan-to-value.

Do you know or work with lenders that provide these options? If not, other recommendations. Thanks.

Hi Kate here.

The now defunct bank, Washington Mutual, was known across the nation for its all in one construction financing. They had the process perfected.

But their greatest competition came from local portfolio banks who, in spite of higher interest rates, offered a more simplified and personal all-in-one process.

So my recommendation is to scour your area for a local bank or two who specialize in construction financing. Compare them to a large bank who offers a similar program.

I'd caution against being swept off your feet by an unknown institution claiming to offer the lowest rate. Building a house is a lengthy process. Starting with bids, plans, and draws before converting to a permanent mortgage, the financing is involved also.

So ask builders. They know if their previous customers were pleased with their banks. Ask friends. Get referrals.

Best wishes, Kate

P.S. Anyone reading this had a good experience with their construction lender in Northern CA? Add their name and phone number in a comment here.

Click here to add your own comment.

You can also ask Kate about your mortgage at Ask Kate About Buying a House.

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