Building your own home can be exciting. You get to build the home just how you want it – you don’t have to rely on a builder’s choices. But with the choice to build your own home comes the need to find a construction loan.
You have two options when financing your home as it’s being built – single-close loan or a two-close loan. Here’s the difference:
- Single-close loan – You get one loan and have one closing. The temporary financing provided to build your home automatically turns into a permanent or traditional loan when the home is built and ready for you to live in it.
- Two-close loan – You will need two loans for this option. The first loan funds the construction of the home and is temporary financing. The second loan is your permanent mortgage. The permanent mortgage pays off the temporary financing once you are able to live in the home.
The Single-Close Construction Loan
The most popular option is the single-close construction loan. This option does offer many benefits including:
- You only have to apply for one loan. We all know how stressful it can be to apply for a loan and waiting for an answer. With the single-close loan, you apply with one bank with one application and get an answer for both the temporary and permanent financing all at once.
- You only have to attend and pay for one closing. Every time you take out a loan, you pay closing costs. If you have a two-close loan, you attend two closings, which can mean double the closing costs. The single-close loan can help you save a little money and time with its one closing.
- You don’t have to requalify for the loan. If you have to apply for a second loan once the home is almost built, you could put yourself at risk of denial. With the single-close loan, you know before you ever put a nail in a board that you have approval for the traditional mortgage when your home is ready for you to move into it.
- You can save money during construction. If your loan turns into a traditional mortgage at the end of the construction phase, the lender may allow you to defer your payments until the traditional mortgage begins. This does mean you’ll pay more interest down the road, but it can help you have a little more cash flow while you build the home and deal with unexpected expenses.
- You may get a lower interest rate. Temporary financing often comes with inflated interest rates because the risk of default is high for a lender. If you have a single-close loan, you have the benefit of getting a lower interest rate because of the permanent financing this loan offers. The risk of default is slightly lower for lenders so they tend to pass the savings onto you.
You can find a single-close construction loan with almost any loan program available today including conventional, FHA, and VA loans. If you are a veteran, you may have a slightly harder time finding a willing lender as VA construction loans are rare only because of the 100% financing they offer. It pays to shop around and inquire about different loan programs to see which one will suit you the best.Click to See the Latest Mortgage Rates»