Construction Mortgage – What You Should Know
A construction mortgage is actually a loan which pays for the construction of a particular property. Through construction, any loans of this kind are either interest only and will disburse funds progressively to the mortgagor once the construction has been completed, or a repayment loan may also be made. While interest only construction mortgages are not as risky as fixed rate construction mortgages, they do carry higher interest rates. This form of mortgage is usually used by construction companies to finance their projects. The most common form of interest only construction mortgage in use today is the construction loan mortgage loan.
Construction loan mortgage loans are also known by the names hardie loan, start up loan or business loan. In general, a construction mortgage loan is secured against a borrower’s residential building. The building phase of any construction venture involves financing sufficient funds to purchase the needed land and equipments, and then employ workers to construct the residential units. A typical construction mortgage loan package includes the following components:
Interest Rate: The interest rate on a construction mortgage loan is determined by a market assessment of current interest rates, prevailing loan rates, and a borrower’s credit rating. Usually, construction companies obtain a mortgage from banks or other financial institutions, where the bank will set the interest rates, while the borrower will refinance his property at a later stage. For construction projects that have been in pre-construction for more than three years, or for which there have been no mortgage loans taken out during the construction phase, the federal government may be an appropriate source for a construction mortgage. Alternatively, construction companies can arrange a mortgage loan themselves.
Term: The term of a construction mortgage refers to the total number of years it takes for the project to finish. Normally, a construction loan is for a term of thirty years. In addition to lowering the interest rates initially incurred, securing competitive rates during the construction period ensures that the borrower has a steady source of income during the construction period, and that he will not have to apply for another mortgage during this period.
Construction Mortgage Loans: There are two types of construction mortgage loans: stand-alone construction loan and construction-to-permanent loan. In the former, the lender issues a construction-to-permanent loan, which is a lien on the underlying property. Once the construction has finished, the borrower can sell the property at a later date to satisfy the construction mortgage, and therefore eliminate the construction-to-permanent loan. In the latter, the construction mortgage remains with the lender, and the borrower secures a construction mortgage loan against the property only if he intends to sell it shortly.
Purpose: There are various purposes for which construction mortgages are used. When securing a mortgage, the lender will consider the intended use of the property when determining the loan amount. For instance, if the borrower intends to convert the existing residence into an apartment, the new loan amount may be based on the value of the existing residence, less the interest rate. Similarly, if the existing residence is going to be used as a business office, the loan amount may be higher to cover all necessary expenses.
Time span for repayment: Sometimes, the lender may require the borrower to pay back the construction loan even after completing the project. For instance, if the lender makes any major structural changes in the building, it may approve the construction loan after a certain time period. However, this time period differs from one lender to another. Before applying for a construction mortgage, make sure that you know how long you will have to pay back the mortgage. If possible, find out the same from the prospective lender.
Types of Construction Mortgage Loans: There are various types of construction loans available in the market. These include bridge loan, construction loan, and traditional mortgage, and land contract. Bridge loan is meant for those who are in the process of renovation of their home or building, while construction loan can be used for undertaking projects that add value to the existing home. Contract loan is meant for those who want to purchase land for building. Last but not least, land contract is meant for those who are looking forward to build a permanent structure on their property.