A construction loan is a specific type of agreement that caters to those wishing to undertake a major construction or renovation project. This type of loan structure is the answer to a growing need on the property market.
How does a Construction Loan Work?
A construction loan differs from a regular home loan in how you receive the money. With a regular commercial or home loan, you typically receive a lump sum at the time of settlement. However, with a construction loan, you receive periodic payments according to the various stages of your construction or renovation. Advances are available to you at the following stages of construction:
– Lock-up – 35% to 55% complete
– Drywall – Approximately 75% complete
– Completion – 100% complete
– Additional withdrawals may be available with approval
Payments are set up this way as a protection measure for the borrower. By getting payments at various stages, you avoid paying your contractor for work that is not completed. When your construction or renovation is complete, the loan reverts to a permanent mortgage, with principal and interest.
The Benefits of Construction Loans:
- Financial security – since payments are made to the contractor or builder as the work progresses, you avoid losing money over incomplete (or poor) work.
- Savings on interest – with a regular home loan, you pay interest on the lump sum, whereas with a construction loan, interest is paid on the amount of the drawn down only.
- Better cash flow – since your loan remains interest only until your construction or renovation is complete, you have a higher cash flow. This can be incredibly helpful, especially if you have to rent temporary living quarters while the work is being carried out.
Depending on your project, a construction loan may be right for you. Sky Financial Corporation DBA The Mortgage Center caters to all kinds of construction companies offering unique builder financing programs to meet all needs. Do not hesitate to discuss with a Sky Financial Corporation professional to see what options are available and to see if you qualify.