Everything You Need To Know About Construction Loans

These loans are good if you have definite construction plans and timelines in place. In this case, the bank pays the builder as the work is being completed. Then, that cost is converted to a mortgage at closing. This type of loan allows you to lock interest rates at closing, which makes for steady payments.

Construction-only loans must be paid off in full once the building is complete. It's a good choice if you have a large amount of cash to work with or you're confident that the proceeds from the sale of your current home will cover another build. Here, if you need a mortgage to cover the cost, you'll have to search for the lender yourself and be approved a second time.

This type of loan is used if you're buying a fixer-upper. In this case, government programs are available and the projected cost of any renovations you plan on doing to the property is wrapped up in the mortgage, along with the purchase price.

Traditional loans are paid out by a mortgage company to cover the cost of the home in one lump-sum at closing. In contrast, construction loans are paid out in installments. A bank will pay the builder as various phases of the building process are completed. The total cost is transferred to you once the entire project is finished.