CONSTRUCTION LOAN FINANCING ARE VARIABLE IN NATURE

2007-03-08 10:33:40

( Financial )



Construction loan financing differs from standard mortgage financing underwritten to financing companies. Lenders base the design of construction loan financing to the specific purpose of individual borrowers in real estate construction and the timing of the financing needed for every stage of construction. The timing and specifications of the construction plan determine the type of construction loan financing scheme that lenders will provide. Thus, construction loan financing is considered variable in nature and not comparable with standard mortgage loans.

Variable Amount and Type of Loan

Lenders decide how much of the total construction cost they will finance under construction loan financing. It is differs from a standard mortgage loan where borrowers are provided a set of standard amount of mortgage based on the type of house and lot being purchased. However, borrowers can use their ownership of the land as equity in construction loan financing. They can eventually convert the loan into a standard mortgage loan after they have been issued the certificate of occupancy signifying that the house being constructed is ready for occupancy. Borrowers benefit from competitive interest rates and longer repayment terms of standard mortgage loans.

Variable Amount of Disbursement

Loan disbursement for construction loan financing is staggered. The amount of loan disbursement varies at various stages of construction. A schedule of stages of construction is required by lenders to determine how much money will be disbursed at each stage. It differs from standard mortgage loan where borrowers are disbursed of the full amount of their loan to pay off real estate agents.

Variable Interest Rate

Lenders charged variable interest rate to construction loan financing. It is based either on the existing prime interest rate in the market or on the short term interest rate being followed by lenders. The interest rate is charged on the amount of loan disbursed at every stages of construction.

Construction loan financing is designed for short term financing. It is usually provided for less than a year. Hence, it is advantageous for borrowers to eventually convert construction loan financing into a mortgage loan. First mortgages are the best option to convert it since it allows longer terms of repayments at lower interest rates.


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