If you’re looking to take out a construction loan for your project, there are many considerations before taking that big step. This article will outline essential factors you should consider before taking out the loan. Before you get started, it’s important to note that every situation is unique. So, while some of these factors may be more or less important to your particular situation, they should all be considered before making your final decision.
Get Pre-Approval
One of the most important things you can do is get pre-approved for a construction loan before starting your project. It’s important to remember that these loans have many unique characteristics and are not the same as traditional residential or commercial mortgages. For example, construction loans have a shorter time frame for repayment of principal and interest, typically requiring payment in 30 or fewer months. If you don’t get pre-approved beforehand, it can be much more difficult to obtain financing at a later time. All institutions will require specific documentation that is often difficult to gather after your project has begun.
Know The Terms of Your Construction Loan and Ask Questions
Understanding the terms of your loan is of the utmost importance. You’ll want to know how much you can borrow, if there are any additional fees and how much interest you will be paying over the loan term.
Remember that some construction loans are not interest-only. Make sure you know if you have to pay both principal and interest during the life of the loan. If your construction loan is not interest only, then come up with a plan for repaying the principal when it’s due. You may want to consider speaking with someone at a local lending institution specializing in these loans.
Understand Your Construction Loan’s Amortization Schedule
Construction loans are not amortizing (loan repayment) loans, meaning that you don’t make regular payments of principal and interest each month. Instead, you usually pay back the principal only when it’s due. Your construction loan’s amortization schedule is what you pay back each month.
Most construction loans have 20 years to pay off, although some have shorter or longer periods to repay the principal. The construction financing companies calculate the amortization schedule by the percentage of the principal that is due each month. For example, if you have a $100,000 construction loan and a 12-month amortization schedule, your monthly payment would be 10% or $10,000 for principal and interest.
Keep in mind that you may want to build a cushion for your monthly payments. Things can happen during your project, and you might need contingency funds.
Consider Who the Lender Is and Their Requirements
Don’t forget about the lender you choose for your construction loan. You’ll want to do some background research on the lending institution, such as their historical interest rates and how well they serve their customers.
Some institutions are better at construction loans than others. For example, some lenders specialize in construction loans while others may not. Make sure you choose the right lender with the expertise to help your project get off the ground. This way, you can, in most cases, be confident that your construction loan will get funded.
Conclusion
If you’re planning on building a new home or commercial property, it’s essential to make sure you understand the parameters of your construction project. You’ll want to start with a construction loan, but you should keep some general points in mind. These loans are different from other types of loans, and if you’re not careful, you could end up paying more in fees and interest than you originally planned.
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