A construction loan allows someone to pay for the costs to build a new home. There are a variety of construction loans available, including spec, rehab, owner builder, and custom.Not long after the completion of your newly constructed home many people will refinance out of their construction loan in order to lower the interest rate and monthly mortgage payment on their home loan. A construction loan does not usually have the most favorable terms and this is why many homeowners will refinance their construction loan to a different mortgage loan program.
Usually you will only pay interest on the money that has been disbursed to date. Often this is an interest only payment. This allows you to keep your payments low during construction. You may also have the option of deferring the payments until after construction is finished. At that point you can refinance, and roll your payments into the final loan.
Construction loans are usually at higher interest rates, and they will usually require a much larger cash reserve(on hand cash in checking, savings, retirement) in the borrowers deposit accounts.
If the home you are building will be a 2nd home, you may be able place a lien against the equity in your existing home if you do not want to put any cash down.
If you already own the land that you plan to build on, it can be used to decrease your loan to value (LTV). In a sense it can act as a down payment for your construction loan. You will need to know the approximate value of the land to know if the lower LTV is enough for your new construction loan.
A construction-permanent loan is a construction loan that automatically converts into a permanent loan after the construction period is over. The benefit to this type of loan is that you don't need to refinance after the construction is finished. This also saves you from having to pay closing costs again.
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