If you’ve just purchased a pristine piece of property and are ready to build your dream house or a first-rate business then it may be necessary for you to obtain a construction loan. These loans work much the same was as regular loans do in that there are several options for length of time and fixed-rate versus adjustable. It’s important to understand your options before heading into the bank.
Building a home from the ground up costs money… lots of money. As such it’s generally necessary to obtain a loan from a bank to do so. Additionally, if you plan on doing a complete remodel to a room or two in your home, a loan might be a good idea here too. Expensive bathroom remodels alone can cost up to $15-25,000 depending on the materials used (even if you got that white bathroom vanity at a major steal!) Construction loans are available in 30 and 15 year fixed-rate options and various adjustable rate loans. It’s up to you to decide which is right for you.
Rate percentages are based on the economic market. A fixed rate loan states that no matter how the market fluctuates, your rate will not increase or decrease. This is advantageous in difficult economic times but when the market rebounds, the rate still remains the same and you cannot take advantage of a lower interest rate.
An adjustable rate loan will fluctuate with the market. In good economic times, the rate is low. In less-than-good economic times, the rate is high. An adjustable rate is more of a gamble than a fixed option but the advantage is that as long as the market is strong your interest rate is low.
Construction loan rates have a combination of fixed and adjustable rates, such as 3/1 ARM, 5/1 ARM, 10/1 ARM and 15/1 ARM. What these loans state is that for the first three years, or five, etc. your rate is fixed. After that initial period, the rate is adjusted once a year, every year for the remainder of the loan.
The most popular, however, is an interest-only construction loan in which the monthly payments cover only the interest on the principle and not the principle itself. This loan can also be combined with a mortgage for the completed house allowing for one closing cost and one application. This type of loan is also known as a ‘one-time close’, ‘all-in-one’, or ‘rollover loan’.
Deciding which construction loan to obtain depends on risk. Perhaps you’re comfortable with the market, or have built enough homes in the past to understand the time frame. If that’s so, then an adjustable rate is ideal. A fixed rate, however, is much less riskier and will allow for predictable monthly payments. A fixed rate is advantageous if your time frame is flexible and less certain. In the end, it comes down to what you’re personally comfortable with. No matter if it’s fixed or adjustable rate there are enough options out there for you to find the construction loan that’s perfect for you and your project.
Northwest Georgia Bank is a leading Chattanooga home loans bank that offers Chattanooga mortgages for first-time home buyers and those looking to build or buy second homes for their growing needs.
