Once you have determined that you are ready to build a home, you will likely need to get a construction loan before you can break ground with a builder. Houses cost a lot of money, and before you can make a deal with your chosen builder, you need to have the funds present. Let’s take a look at what you need to know about new home construction loans.
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Types of Loans
Construction loans are the best way to get started on your home. They will give your builder pay to begin construction, and continue to dish out money as it progresses. Construction loans are risky for a bank because they do not have a built house to use as collateral for the loan, making them hard to get with poor credit or excessive risk. This can also make interest rates high or require a larger down payment.
There are two main types of home construction loans for future homeowners.
Construction to permanent loans are those that fund a construction phase, and use that accrued debt to form a mortgage. This means that there is only one process. You should be able to secure a fixed rate mortgage at this time for after construction. During construction, you are paying interest only on the money that has been used. Once the home has been built, the debt accrued through construction is then converted to a permanent mortgage for either 15 or 30 years typically.
Stand-alone construction loans are those that just pay for construction and do not provide permanent financing. A stand-alone construction loan is short term, and the debt will be due in a short period of time. This means, when construction is completed you will owe that money to the bank. You must pay that back immediately, or over time with a mortgage, but each of these loans are separate entities. This requires that you apply for two separate loans, pay two down payments, and pay two sets of fees.
People that need to pay another mortgage or rent while they are building a new one typically opt for a stand-alone-construction loan because they are cheaper up front, and help keep your building expenses low while you still need to pay to live in another place.
Choosing a Loan
Every loan comes at a risk for both you and your builder. Depending on your situation, finances, and comfort with risk, you will need a different type of loan. Make sure to assess your financial situation, future needs, and a timeline of payments. If you are able to, a 15 year mortgage will be cheaper in the long run because you will pay less interest.
Interest rates will be a big factor in determining the best loan. Loans with the lowest interest rates will save you the most money, but often require the best financial health. You should also go with a trustworthy lender that you know will be fair throughout the lifetime of your mortgage. Because homeownership takes so much time, it is crucial that you are comfortable with your lender.
What You Should Expect to Pay
Homes are costly. Every factor and detail adds up, so make sure that you are financially prepared to build a home before beginning. Here’s a starting list of things that you should include in your budget before going to get a loan.
- Cost of land or lot
- Construction cost
- Unexpected expenses
As you build your home, you can come across a lot of expenses that you were not aware of. This can put a real strain on your wallet, and compromise your build. These expenses come when you change your mind about an aspect of your home during construction, and from possible problems that arise. Although you cannot estimate how much extra money you will need, you should always be prepared for extraneous expenses so you are not left blindsided.
Building with NuStar
NuStar is dedicated to building you a Utah home that you can be proud of. We believe in doing a job well done, without taking shortcuts. Utah is a beautiful state with plenty of opportunity to build the home of your dreams.
If you are ready to begin building your new home, give us a call today at (801)523-8499 or contact us here. We are looking forward to building with you.