Smart Ideas: Resources Revisited
There are some unions that finance home buyers or those who want to build their homes, and this funding is referred to as construction loans, which is usually a short term loan. People who want to build investment projects cannot be allowed to access construction loans, but instead they should apply for permanent mortgage loans because construction loans are for people building their own homes. These loans are used to finance a building project before you get a long term funding and they are for a period of one year.
This loan has a wide range of benefits, but they are viewed as very risky hence lenders charge a higher interest rate than the usual rate for a normal loan. After completion of the building project the borrower is supposed to refinance the loan into a permanent mortgage loan or get a loan to service the construction loan. It follows that during the construction process, the borrower is supposed to pay the interest only until the project is completed so that the balance can be paid. Since the loan is purposely for construction of the owner’s real home, lenders have adopted a way of paying the contractors instead of giving the loan to the borrower directly. When this happens the lender gives out the loan in installments as the project approach new construction stages as the contractor requires to pay.
When seeking for a construction loan, you should have to provide some amount which mostly requires to be about twenty to twenty-five percent of the total cost of a construction project. This loans are not easy to get especially if the borrower has a limited credit history or doubtful financial background. For obvious reasons, the borrower has to submit comprehensive project details to the lender and also prove to him that the money will do its right work correctly to prevent losses. Construction loans are usually offered by local credit unions and regional banks because they are familiar with the builders and contractors of their region and therefore feel more comfortable when financing members of their community.
Following are the advantages of using construction loans to another kind of loans when building homes. According to the dictates of nature money has never lacked uses neither has anybody had had enough and therefore giving the borrower the full amount, the money can be diverted to other uses other than project construction hence paying the money to the contractor prevents this irregularity. Importantly, it requires the borrower to pay only the interest as the project is continuing and monthly installments after the construction is complete are lower enough and affordable and also the payable period is long enough. For all kinds of loans the government has to tax, which increases the cost, but as for construction loans, there is no government intervention, and therefore, their costs are usually lower. Construction loans don’t have fixed interest rates but depend on the money market, which affects Retail Prime Lending Rates.