Pros and Cons of Construction-to-Permanent Loan

An interest-bearing construction loan provides the funds necessary to build a residential property over a short period. A construction loan typically lasts one year.

FREMONT, CA: A construction-to-permanent loan, also known as a single-close loan, is a loan used to finance the cost of purchasing land, constructing a home on that land, and then serving as the mortgage on the home once construction is complete. Construction loans are ideal for borrowers who want to build a custom home on a specific lot using their contractors.

Typically, clients would need two separate loans for these purposes: a construction loan to purchase land and build a home and a mortgage loan to finance the completed home. A construction-to-permanent loan satisfies both objectives. Construction loans convert to permanent mortgages with a fixed interest rate and a term of 15 to 30 years after construction is completed.

Here is an illustration of how a construction-to-permanent loan functions and how it can streamline the financing process. For instance, Mark and Cindy want to construct a custom home from scratch on a lot for sale. They consult an architect and various contractors to determine the cost of building a custom home. Cindy and Mark apply for a construction-to-permanent loan from a reputable lender, armed with an initial cost estimate that they deem to be within their budget. After providing meticulous documentation, including confirmation that the proposed home will comply with local building codes, the loan is approved. Without having to apply for multiple loans, they can now purchase the lot and pay their contractors in stages as the project dictates.

Advantages of a Construction-to-Permanent Loan

There are numerous benefits associated with a construction-to-permanent loan. First, this type of loan functions like a line of credit in that clients can withdraw the money they require when needed.

During the construction phase, customers are charged interest only on the withdrawals they make. For up to 18 months, while their home is being constructed, they will only make interest payments on the construction loan portion.