When you need a loan to move into a new home, you might need to consider a mortgage loan vs. construction loan. For those building a new house, a trusted mortgage broker in El Paso may suggest a construction loan that eventually becomes a permanent mortgage. Those buying existing homes would stick with the traditional mortgage loan.
Learn more about when each type of borrowing applies to the purchase of a home.
When To Use Each Type of Loan
Most of the time, lending institutions will require you to use mortgage and construction loans in specific circumstances. You use a mortgage to purchase an existing home. This long-term loan will cover the cost of purchasing the house.
People use a construction loan when they build a new home. This short-term loan can pay for the lot, materials, and labor. Once the house is finished and you move in, you’ll either convert the construction loan into a mortgage or open a new mortgage to pay off the construction loan.
Many people prefer a construction loan that rolls into a mortgage because they usually only pay closing costs once. If the construction and mortgage loans are completely separate, you might pay two sets of closing costs. However, opening a separate mortgage after the construction loan can be beneficial in trying to receive lower interest rates, depending on your circumstances.
Key Differences Between Mortgage and Construction Loans
When comparing a mortgage loan vs. construction loan for a home, you need to be aware of several important differences.
Length of the Loan
A typical construction loan will last one to two years, depending on the timeline for building the new house. Mortgages are designed for a 15-to-30-year repayment.
The loan repayment terms differ, too, as someone using a construction loan would pay it off in a lump sum with the proceeds from the subsequent mortgage loan. You’d pay off a mortgage loan over time from your personal finances.
Disbursement of Funds
Lending institutions release funds for the construction loan in phases as costs come due for materials and labor. A benefit of this format is that you’d make monthly payments based only on the amount borrowed up to that point.
Lending institutions disperse funds in a mortgage loan as a lump sum to cover the property’s entire purchase price.
Interest Rate Paid
Construction loans usually require a higher interest rate than a mortgage because they carry more risk. The lender is trusting the builder to finish the work on time and on budget.
However, when you open a mortgage afterward, you’ll receive a normal interest rate on that loan.
Qualification and Collateral
So, what are mortgage loan vs. construction loan qaulifications? Qualifying for a construction loan is more complex than a mortgage because there’s no home yet to use as collateral. You’ll have to show the lender the blueprints for the house. The construction company may have to prove its qualifications and success with past home-building projects.
Both loans require you to prove your credit history, financial stability, and debt-to-income ratio.
Champions Mortgage Team Can Explain Your Borrowing Options for Buying or Building a Home
When you are unsure whether you want to buy or build a home, Champions Mortgage Team can discuss the pros and cons of a mortgage loan vs. construction loan. Because the process of qualifying for a construction financing loan is more complex, speaking with us as early as possible will help your project advance on your timeline.
We’ll explain the differences and find the best possible down payment and mortgage terms for you. For an appointment, contact us today at (281) 727-2500. We are the local experts you can rely on for property loans.
