Building a new home can be costly, which is why lenders offer construction loans. However, you should think beyond construction to the mortgage stage. Sometimes homeowners end up taking out a mortgage separate from a construction loan when it is not necessary.
Financing the construction and eventual mortgage in a single loan greatly simplifies the process of paying off your new residence. Applying for a construction to permanent loan comes with multiple advantages.
Eliminate the need for a second lender
Buying land, managing builders and overseeing construction is stressful enough without also applying for a mortgage. Additionally, not all construction financiers offer mortgages. This can leave you stuck shopping for another lender at the last minute.
With a construction to permanent loan, you can consolidate both your construction and mortgage financing at a single lender and at the same time. This sidesteps all the headaches that come with a frantic search for another lender.
Prevent second closing costs
Closing on a mortgage incurs costs like appraisal fees and application fees, among other expenses. With a standalone construction loan, closing costs get paid when you originally borrow, and then a second time when you take out a mortgage. By contrast, a construction to permanent loan only necessitates one closing process, which can save thousands in extra fees.
Secure better interest rates
Another plus is the potential to lock in interest rates for the mortgage portion early. Separate construction loans generally carry variable rates, while construction to permanent loans allow borrowers to lock in a fixed rate for eventual principal and interest payments. This grants insulation from rising rates over the course of the construction.
Construction to permanent loans are not always easy to acquire. According to Bankrate, applicants generally need to put down a 20% down payment, have a minimal credit score of 680 and a low debt-to-income ratio to qualify, although some lenders relax these standards. Still, the convenience and savings of these loans tend to balance out greater qualification barriers and make them more beneficial in the long run.