If you are thinking of starting a construction project, be it a new home or space altogether or simply renovation, we are sure it’s a very exciting endeavor. But the thought of the financial aspects of starting this endeavor can be a very discouraging factor. Nowadays, people are turning to construction financing in order to fund their dreams of building a home from the ground up. In this guide, we will help you sort out the difficulties of construction loans, and try to clearly understand what they require and how these mortgage loans can benefit aspiring homeowners.
What Are Construction Mortgage Loans?
Simply referred as construction mortgage loan, these are loans specialized to financial fund to the construction of anything. Unlike the traditional mortgages that you are aware of, look at how much a home is worth now by checking how it compares to other recently sold homes in the area. In contrast, construction loans focus on estimating the future value of the new house once it’s finished.
There are two types of Mortgage loans:
- Construction-to-permanent loan: This type of financing would be ideal if you have clear plans for building and a set schedule. The lender pays the contractor as the work progresses. After the construction, the loan turns into a regular mortgage, and you get a fixed interest rate.
- Construction-only loans work: in this type of loan, you need to repay the entire loan once the construction is finished. People usually go for these loans if they have savings or plan to use money from selling their current home to pay for the new one. After clearing the construction loan, they can apply for a traditional mortgage to cover any outstanding costs.
Considerations for If You Are Planning to Take a Construction Financing
- Detailed planning: The process of approval for this loan is very stringent; therefore, if you plan on taking this loan, ensure that you have a meticulous plan. It’s important that the plan provides a detailed project plan, construction timelines and a complete financial assessment.
- Financial precautions: It’s important that you include a contingency fund in your budget. Because due to the potential for cost overruns, unexpected expenses may arise during construction.
- Ownership of Land: Always ensure that you either own the land outright or are prepared to include the land purchase within the loan, meeting the lender’s requirements.
- Short-term nature: Borrowers should know the short-term nature of construction loans and be prepared to refinance into a long-term mortgage once construction is complete.
- Regular project check-ins: Engage with your lender during the construction process, as phased check-ins help ensure that the project stays on track and that funds are disbursed appropriately based on the progress.
Pros of Construction Loans
- Tailored financing: Construction financing offer customized financing solutions, allowing borrowers to build homes that suit their specific needs and preferences. Borrowers have more control over the construction process, including decisions on materials, design changes, and other aspects of the project.
- Interest-only During Construction: With these loans, you are only required to pay interest and don’t have to worry about paying off the actual loan amount until the construction is done. this means that the borrower gets extra time to save money for the down payment during closing of the deal.
- Flexible terms: Construction loans are more flexible compared to regular loans, allowing you and your lender to adjust things based on the project’s needs. This flexibility makes it easier to navigate changes during the construction process.
- Phased Check-ins Keep Things On-track: lenders will check the progress of your home during construction before releasing more money. This is done in order to ensure that the builder sticks to the scheduled budget. Thereby helping to keep everything on track and ensuring your project is moving forward smoothly.
Cons of Construction Loans
- Potential cost overruns: Construction projects are susceptible to unforeseen costs or delays, and borrowers should be prepared for the possibility of cost overruns and plan accordingly.
- Short-term nature: Construction loans are short-term loans. Borrowers must be ready to refinance into a long-term mortgage once the construction is complete. Also, if your building still needs to be finished by the time the loan is due, you might have to pay extra fees to extend the terms.
- Risk of Property Value Not Increasing: There’s a chance that the value of your property may not go up as much as you thought. This means you may owe more money than what your home is worth.
- Incomplete construction risk: If your builder doesn’t keep their promises, you might be stuck with a partially finished home. This can be a problem if you can’t find a way to get more money for the rest of the construction.
If you’re looking for the best construction loan advisor in Dubai, reach out to Cozmo Mortgages. Our experienced team can provide the guidance you need.