A Guide to Different Types of Construction Financing
This article explains the two main types of construction loans—construction-to-permanent and stand-alone construction loans—highlighting their features, benefits, and considerations. It helps prospective homeowners understand their financing options to make informed decisions when building a new home.
Exploring Different Construction Loan Options
One of the main challenges when building your ideal home is understanding financing choices and selecting the appropriate construction loan. Major lenders typically provide two primary options: construction-to-permanent loans and stand-alone construction loans. The construction-to-permanent loan combines funding for building your home with a mortgage that kicks in after completion. Conversely, stand-alone construction loans are separate, initially covering construction costs with a later mortgage to settle the loan once the project is finished.
Construction-to-permanent financing: During construction, borrowers typically pay only interest on the amount drawn, with variable rates influenced by market conditions and Federal Reserve policies. Once construction completes, the loan converts into a standard mortgage.
The rates and down payments depend on the lender’s policies and the borrower’s creditworthiness.
