Point of Interest
Construction loans give you the ability to build the home of your dreams, whether it is your primary or secondary residence. You must select the right lender and the correct type of construction loan to have the best experience possible.
A construction loan is a short-term type of loan that’s used to pay for building a house or other real estate project. The best construction loans have competitive fixed interest rates, low down payment requirements and other additional benefits such as fast loan approval or the ability to lock in an interest rate for a set time. Let’s take a closer look at how construction loans differ from other popular loans and four of the best construction loans of 2019.
The 4 Best Construction Loans
|Lender||Premiums||Down Payment||Key Benefit|
|First National Bank||Low fixed interest rates; interest-only payments during construction period||20%||Only close once; construction loan converts to a permanent loan after construction is completed, or after 12 months reducing overall loan fees|
|U.S. Bank||N/A||20%||Face-to-face support|
|Wells Fargo||Lock-in interest 24 months||11%||Online application available and a strong network of loan officers|
|Normandy||10.95% APR||25%||Quick loan approval, within 21 days|
4 best construction loan rates of 2020
First National Bank – Best for reducing loan costs
The First National Bank offers fixed interest rates and interest-only payments during the construction period. Typically, a down payment of 20% is required, but less may be allowed if you have private mortgage insurance. The best aspect about this lender’s construction loan is that it converts to a permanent loan after the home is complete, or after 12 months, so you only have to pay one set of closing costs. Construction loans from First National Bank can be used for primary or secondary residences.
U.S. Bank – Best customer support
U.S. Bank is well-versed in the construction loan sector and offers several types of construction loans. The interest rates are not specified on its website, but it assigns a personalized loan officer who meets with you, in-person, to discuss the rates and loan terms. The bank typically requires a deposit of 20% and is available in 41 U.S. states. U.S. Bank also provides helpful information and tips to select the best builder to complete your job the right way.
Wells Fargo – Best for reducing interest rate payments
Wells Fargo allows customers to apply for construction loans online and has an extensive network of loan officers over the phone. The bank also lets customers participate in its Builder Best Extended Rate Lock program, locking in an interest rate for up to 24 months, so customers don’t have to rush into choosing a builder or finalizing designs before funding construction. Bear in mind; this program does come with a non-refundable extended lock fee.
Normandy – Fastest loan approvals
Normandy typically charges an interest rate of up to 10.95% APR and requires a minimum deposit of 25% for construction loans. It’s ideal for time-strapped customers, as loan approvals generally occur within 21 days. It also provides the option for a 14-day fast-track closing for a fee of $1,250. Loans are available from $100,000 up to $4,000,000, with terms generally up to 18 months. Longer terms may be available on a unique case by case basis.
What is a Construction Loan?
A home construction loan is a short-term loan taken out to fund the building of a new home. Unlike a traditional mortgage, the loan is broken up into installments that are repaid at different stages throughout the build. A benefit to this is you’re only paying interest on the portion of money currently outstanding. However, the rates may be higher on this type of loan.
To qualify for a construction loan, you must have a licensed and qualified builder with detailed plans and specifications for the build. Additionally, your projected build often must be appraised to meet the lender’s requirements, and you generally need a credit score of at least 680, and your down payment requirement might be much higher (around 20%-25%).
Types of construction loans
Construction loans come in two main types that differ mainly from what happens at the end of the building.
- Construction-only loan – With this loan type, the full amount of the loan is due after construction. An excellent example of when this is a good fit would be while planning to sell your old home and have enough equity to cover the cost of the new build.
- Construction-to-permanent loan – This type of construction loan converts to a traditional mortgage at the end of the build and is ideal for builds that you won’t have all the necessary funds to cover at the end of construction.
When should I get a construction loan?
If you’re interested in building your next home, a construction loan could be the right choice. However, there are several areas you need to consider. First, as mentioned, the requirements to get a construction loan are much stricter. If you don’t meet or exceed these, you may want to shy away from a construction loan. Additionally, the building’s costs could go up during the build, which may create a need for additional resources. Not being prepared could put you in a precarious situation.
You should only utilize a home construction loan if you are working with a trusted builder or have experience with the process. Without one of these conditions being true, you could be walking into a complicated situation you and your builder cannot handle properly.
Construction Loans vs Other Loans
Construction Loan vs Traditional Mortgage
Unlike a traditional mortgage, construction loans are not long-term loans that allow you to pay off your home’s cost over time. They are short-term loans with higher down payment requirements that are designed to fund the build and get paid off. In fact, many people will use a traditional 30-year mortgage model to pay off a construction loan.
With a construction loan, payments are paid out after each phase of construction is completed, instead of a lump-sum payment associated with traditional mortgages. Additionally, lenders of construction loans will also require more information than a traditional loan, such as detailed construction plans and budgets.
Construction Loan vs HELOC
A construction loan enables you to build a home through payments that are disbursed over a term. Alternatively, a home equity line of credit — also known as a HELOC — is a revolving credit line that is secured against your existing home’s equity. HELOCs have lower interest rates than construction loans as they are secured by an existing home. However, like a construction loan, you only pay interest on the money you’ve withdrawn during the draw period. When the draw period on a HELOC ends, which is often after 10 years, the repayment period begins in which you repay the principal balance plus interest over an extended period of 15 to 25 years.
Construction Loan vs Home Equity Loan
A home equity loan is sometimes also known as a “second mortgage.” It allows customers to use their home equity to borrow a lump sum of money. The loan amount is based on the difference between a homeowner’s mortgage debt owed and the home’s current market value. The equity in the home is the collateral for a lender. In contrast, with a construction loan, the lender doesn’t have collateral, so the lender usually charges a higher interest rate and have more stringent requirements to qualify for lending. Also, you make repayment of principal and interest over a longer period with a home equity loan, instead of full payment after one year with a construction loan.
The Final Word
Building a new home from the ground up is interesting and exciting. You get to pick out and design every nook and cranny of the new house. But if you don’t take the time to secure funding from the right lender, you may put yourself in a less-than-ideal situation. The experience can be everything you hope it will be with a good builder and the right lender.