There are some unions that finance home buyers or those who want to build their homes, and this funding is referred to as construction loans, which is usually a short term loan. These loans are given to people who are building their real homes or home buyers and not rentals. Construction loans are given for a period of one year to serve the beginning of a project before the home builder get other funding.
This loan has a wide range of benefits, but they are viewed as very risky hence lenders charge a higher interest rate than the usual rate for a normal loan. After completion of the building project the borrower is supposed to refinance the loan into a permanent mortgage loan or get a loan to service the construction loan. It follows that during the construction process, the borrower is supposed to pay the interest only until the project is completed so that the balance can be paid. In the process of ensuring that the loan serves its purpose lenders usually pay the contractors themselves on behalf of the borrower. When this happens the lender gives out the loan in installments as the project approach new construction stages as the contractor requires to pay.
When seeking for a construction loan, you should have to provide some amount which mostly requires to be about twenty to twenty-five percent of the total cost of a construction project. This loans are not easy to get especially if the borrower has a limited credit history or doubtful financial background. The lender requires the full details concerning the building project from the borrower and also a guarantee that the contractor is experienced to do the project properly. Construction loans are usually offered by local credit unions and regional banks because they are familiar with the builders and contractors of their region and therefore feel more comfortable when financing members of their community.
For people intending to build their homes or their own plots, construction loans is advisable because of the following benefits. When the lender advances the loan as the construction project proceeds helps the borrower to keep focused on the project and not divert the loan to other uses. These loans are effective when it comes to paying because the monthly installments required are low and affordable as the time to completely pay the loan is long enough. Taxation increases the cost of loans, but only for construction loans, costs are not subjected to any taxation making them affordable. The interest rates through higher than that of a permanent mortgage loan, the interest rate applicable is based on the money market which will affect the Retail Prime Lending Rate (RPLR).