Construction Financing
Definition of "Construction Financing"
The method of financing used when a borrower contracts to have a house built, as opposed to purchasing a completed house. Construction can be financed in two ways. One way is to use two loans, a construction loan for the period of construction, followed by a permanent loan from another lender, which pays off the construction loan. Borrowers who use two loans must decide whether they will take out the construction loan, or have the builder do it. The second approach is to use a single combination loan, where the construction loan becomes permanent at the end of the construction period. Some lenders (primarily commercial banks) will only make construction loans. Others will only make combination loans. And some will do it either way. Two Loans Versus One Loan: Two loans mean that you shop twice and incur two sets of closing costs. One loan means that you shop only once and incur only one set of closing costs. But, to do it effectively, you must shop construction loans and permanent loans at the same time. Construction loans usually run for six months to a year and carry an adjustable interest rate that resets monthly or quarterly. In addition to points and closing costs, lenders charge a construction fee to cover their costs in administering the loan. (Construction lenders pay out the loan in stages and must monitor the progress of construction). In shopping construction loans, one must take account of all of these dimensions of the 'price.' Lenders offering combination loans typically will credit some of the fees paid for the construction loan toward the permanent loan. The lender might charge four points for the construction loan, for example, but apply three of the points toward the permanent loan. If the borrower takes the permanent loan from another lender, however, the construction lender retains the three points. This credit plus the one set of closing costs are major talking points of loan officers pushing combination loans.
Popular Mortgage Terms
A transaction in which interest is not paid on interest there is no compounding. For example, if you deposit $1,000 in an account that pays 5% a year simple interest, you would receive ...
The definition of a reverse mortgage is important for homeowners 62 and older who want to supplement their retirement income. What exactly is a reverse mortgage? Some say that it is the ...
A lender who delivers loans to another (usually larger) lender against prior price commitments the larger lender has made to the correspondent. Mortgage brokers sometimes evolve into ...
The dollar amount of interest paid each month. The interest payment is the same as interest due so long as the scheduled mortgage payment is equal to or greater than the interest due. ...
An option attached to a mortgage, which allows the borrower to pay only the interest for some period. A mortgage is 'interest only' if the monthly mortgage payment does not include any ...
Every ARM is tied to an interest rate index. An index has three relevant features:availibility, level, volatility. All the common ARM indexes are readily available from a published source, ...
The most recently published value of the index used to adjust the interest rate on an indexed ARM. ...
The assumption that the index value to which the interest rate on an ARM is tied follows the same pattern as in some prior historical period. In meeting their disclosure obligations in ...
The rate charged the borrower each period for the loan of money, by custom quoted on an annual basis. A mortgage interest rate is a rate on a loan secured by a specific property. ...
Have a question or comment?
We're here to help.