CONSTRUCTION LOANS VS MORTGAGES
When you purchase an existing home, the financing process is complete when the loan closes. With a construction loan, the closing is only the beginning. A construction loan is a short-term loan to fund the construction of your new home. When building is complete, your construction loan will be converted to a long-term mortgage.
Most construction loans have a term of six to nine months, depending on the complexity of the project. Many banks charge closing costs and require separate paperwork for both your construction loan and your mortgage loan. Marine Bank offers a single construction-to-permanent financing option to minimize your costs and maximize your time.
A construction loan functions much like a line of credit, with your loan amount being the maximum funds available. While you have a construction loan, you pay only interest on the money you have drawn. This means that your payments will be less than if you were paying both interest and principal. Interest is calculated on the money advanced during each billing cycle, not on the entire loan amount. You will receive a billing statement monthly.
Your general contractor, suppliers and subcontractors will be paid as work on the house progresses. Your contractor will submit invoices to cover costs incurred. You will approve those invoices, and lender will pay suppliers and subcontractors directly. This process allows you to oversee construction costs, while ensuring that contractors are paid in a timely manner.
The mechanics lien law protects suppliers and subcontractors from clients who don’t pay their bills. Anyone who was not fully paid for work on a new home may file a mechanic’s lien, which secures interest in the real estate much like a mortgage does.
Each time a payment is sent to a supplier or subcontractor, we ask for a signed lien waiver verifying that payment was received and that all lien rights have been extinguished. Similarly, when your home is complete, we ask your general contractor for a sworn statement attesting that all suppliers and subcontractors have been paid. Along with the lien waivers, the statement paves the way for finalizing your permanent mortgage.
The amount of your construction loan must be calculated very carefully. You will want to consider the cost of buying and developing the building site, soft costs such as permit fees, construction costs – including materials and labor for all of the subcontractors such as masons, electricians and landscapers – and the costs of financing.
*All content herein is for information purposes only. Please refer to your lender professional for confirmation of content.