Construction Loan

Many buyers will likely get a construction to permanent loan. These loans are commonly referred to as Construction Loans. It consists of two parts. First is the interim loan used while the house is under construction. After the construction period the loan then converts to a permanent loan when construction is completed (i.e. a certificate of occupancy is issued). NOTE: Some mortgage brokers sell permanent loans and construction loans separately. These type of loans can be more costly then traditional construction to permanent loan. Therefore any savings you might be shown in a lowered interest rate might be lost in the loan's closing and other costs.

Bear in mind with a construction-to-permanent loan you will have two closings. The first will be the primary closing which is done normally at either a bank or title company and can be done at the same time as a property (lot/land) closing. The second is done normally at either the bank and/or at your home or builder’s office. When referring to a closing make sure you understand which loan closing you or the other parties are referring too.

Types of Loans

Fixed - A mortgage in which the interest rate does not change during the entire term of the loan, most often 15 years or 30 years.
Adjustable - An adjustable-rate mortgage (ARM) that has an initial interest rate for one year, and thereafter has an adjustment interval of one year. The adjustment is based on a comparison of interest caps and the indexed rate.
Fixed to Adjustable (sometime referred to the year of change like: (10/1) - An adjustable-rate mortgage (ARM) that has an initial interest rate for a specific number of years, and thereafter has an adjustment interval of one year. The adjustment is based on a comparison of interest caps and the indexed rate.

Appraisals

It is important to understand the impact of your loan in conjunction to a property appraisal which will be required by the bank. (click here to visit our Appraisal information page)

Resource Links

Bankrate.com - Mortgage Terms

Last Updated: March 01, 2005 10:40 PM