Understanding the Basics of a Construction Loan

Building a home can be stressful. Figuring out the appropriate mortgage product doesn’t have to be. Most people understand the basics of a standard mortgage, but many don’t understand that there is a different approach when you decide to build a home. We are here to break down the basic characteristics of a construction loan so your dream of building a home can become a reality!

How Does a Construction Loan Differ From a Standard Loan?

A standard home loan is a mortgage on an existing home, where the borrower makes principal and interest payments for the entirety of the loan, which is typically between 15 to 30 years.

A construction loan lasts only the amount of time it takes to construct the home, usually 6 to 12 months. It is similar to a credit card, where you are approved to spend up to a certain amount in order to build your home, but unlike a credit card, you cannot withdraw funds whenever you want. Instead, the loan is typically set up with a pre-defined schedule of fund advances, which are disbursed directly to the contractor.

You Need a Construction Loan and a Permanent Mortgage

Since a construction loan only lasts for the duration of the building process, you then need to convert to a permanent mortgage. Construction loans typically require interest-only payments during construction and then become due upon completion. This balance is either paid off or rolled over into a typical 30-year mortgage.

At ENB, we want to make this transition as seamless as possible. Our Construction-To-Permanent Mortgage converts the construction of your new home to the permanent financing, with just one closing. This will save you time and money since you will only fill out one mortgage application and only pay closing costs once.

Why Are The Interests Rates for a Construction Loan so High?

The interest rate for a construction loan is higher than a standard loan. This is because there is more risk for the lender. If a borrower backs out half way through construction, the lender is left with a half built home as collateral. Moving the building process along quickly will help to minimize the total amount of interest that you pay. With every day that passes, you are paying interest in a range of 4% to 9% on the money you have drawn (depending on the upfront fees you paid). So typically, the faster your building schedule goes, the lower your overall costs will be. ENB can help eliminate this variable with our Construction-To-Permanent Mortgage which offers the same low rate during construction as we offer for the permanent loan.