Construction Financing
Definition of "Construction Financing"
The method of financing used when a borrower contracts to have a house built, as opposed to purchasing a completed house. Construction can be financed in two ways. One way is to use two loans, a construction loan for the period of construction, followed by a permanent loan from another lender, which pays off the construction loan. Borrowers who use two loans must decide whether they will take out the construction loan, or have the builder do it. The second approach is to use a single combination loan, where the construction loan becomes permanent at the end of the construction period. Some lenders (primarily commercial banks) will only make construction loans. Others will only make combination loans. And some will do it either way. Two Loans Versus One Loan: Two loans mean that you shop twice and incur two sets of closing costs. One loan means that you shop only once and incur only one set of closing costs. But, to do it effectively, you must shop construction loans and permanent loans at the same time. Construction loans usually run for six months to a year and carry an adjustable interest rate that resets monthly or quarterly. In addition to points and closing costs, lenders charge a construction fee to cover their costs in administering the loan. (Construction lenders pay out the loan in stages and must monitor the progress of construction). In shopping construction loans, one must take account of all of these dimensions of the 'price.' Lenders offering combination loans typically will credit some of the fees paid for the construction loan toward the permanent loan. The lender might charge four points for the construction loan, for example, but apply three of the points toward the permanent loan. If the borrower takes the permanent loan from another lender, however, the construction lender retains the three points. This credit plus the one set of closing costs are major talking points of loan officers pushing combination loans.
Popular Mortgage Terms
A particular combination of loan, borrower, property, and transaction characteristics that lenders use in setting prices and underwriting requirements. ...
A mortgage on which interest is calculated daily based on the balance on the day of payment, rather than monthly, as on the standard mortgage. ...
Same as term Points: An upfront cash payment required by the lender as part of the charge for the loan, expressed as a percent of the loan amount; e.g., '3 points' means a charge equal to ...
A document that evidences a debt and a promise to repay. A mortgage loan transaction always includes a note evidencing the debt, and a mortgage evidencing the lien on the property. ...
A second mortgage on a property that is not paid off when the first mortgage is refinanced. The second mortgage lender must allow subordination of the second to the new first mortgage. ...
A loan eligible for purchase by the two major federal agencies that buy mortgages, Fannie Mae and Freddie Mac. Conforming mortgages cannot exceed a legal maximum amount, which was $322,700 ...
Making a payment larger than the fully amortizing payment as a way of retiring the loan before term. Making Extra Payments as an Investment: Suppose you add $100 to the scheduled ...
A collateralized debt obligation, also known as CDO, defines a complex financial product. Various loans, mortgages, bonds, and valuables back this commodity, and institutional investors ...
Adjustable rate mortgages on which the interest rate is mechanically determined based on the value of an interest rate index. Indexed ARMs are distinguished from Discretionary ARMs, in that ...
Have a question or comment?
We're here to help.