EBOOK | How do construction loans work

A construction loan is a mortgage agreement designed specifically for those who are building a new home. This is how it works:

  1. You buy the vacant land first and then arrange to build on this land in an agreed timeframe ( or you can make a deposit to the lender – usually 20% of the total cost although some will lend up to 95%) This provides the lender with security and a commitment from you.
  2. The lender releases funds as progress is made. This is the more traditional method. Point one speaks for itself, but let’s take a closer look at point two. With a construction loan, the lender considers the total amount required to pay the builder to complete construction.

This amount is then broken down into ‘progress payments’; separate payments that come out of your mortgage fund
and are made at each phase of the building process to the builder. The lender will only require you to pay interest due on the amounts drawn. Let’s use this construction loan example to demonstrate.

If you loan is for $300,000 and your first invoice is for $55,000, the interest will be calculated on your account balance of

$55,000 as well as fees. Full principal and interest payments begin once the house is built and you are in your home.

Read EBOOK | How do construction loans work

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