Unless you are paying cash for the construction of a new custom home, it is likely that you will need to obtain a construction loan. Unlike the purchase of an already established residence, those who opt to build will typically need to finance the cost of the labor and materials at the start of the home-building process.
When doing so, there are two types of construction loans that you may be able to choose from, depending on your specific needs and goals. These include either a stand-alone construction loan, or alternatively a construction-to-permanent loan.
In the case of a stand-alone construction loan, you will use these funds during the time that the home is being built, and then you will need to secure a home mortgage when the building of the home has been completed.
If you currently own a home and you do not have a great deal of available cash to use for a down payment, going this route could be the better alternative. However, it is also important to consider that you will have two separate sets of closing costs – one for the construction loan, and one for the future home mortgage. In addition, because you won’t be securing the mortgage loan until a later date in the future, you can also run the risk of interest rates going up.
If, however, you choose to go with a construction-to-permanent loan, you will have just one, single closing. Usually, this scenario will only require that you pay interest on the loan’s outstanding balance during the home building process. Then, your lender will convert the construction loan over into a permanent mortgage when the builder has completed your new home.
If you go with a construction-to-permanent loan option, you can also lock in your interest rate up front. However, it will usually be required that you provide a down payment of at least 20 percent.
If you’ve been considering building a new custom home in Orlando or the surrounding Central Florida area, give us a call. We will walk you through all of the key details, so that you’ll know exactly what to anticipate going forward.
