Construction Loans: A Dream Loan for Your Dream Home
Ready to build your dream home? Here are six things to know about construction loans.
In the 1948 movie “Mr. Blandings Builds his Dream House,” Mr. and Mrs. Blandings, played by Cary Grant and Myrna Loy, experience the perks and pitfalls of building a home.
They relish the opportunity to customize the house to their exact specifications: two closets in every room (“If there’s one things this family needs, it’s closets.”), four bathrooms (“I refuse to endanger the lives of my children in a house with less than four bathrooms.”), and a little utility room upstairs (“…where I can be alone and sew, or sulk, on a rainy day.”).
But building the Blandings’ perfect house becomes a bit more complicated than they bargained for. Through the process, they learn that geology can be uncooperative, contractors can make mistakes, and home mortgages can be misunderstood.
While hiccups may be inevitable in any construction project, a construction home loan can streamline and simplify the process. Here are six things the Blandings — and anyone dreaming of a new home — should know about construction loans.
Construction Loan Fact #1
Construction loans, like houses, come in all types configurations. Whether you’re looking at a new build or a major remodel, you can find a construction loan structured to fit your unique needs. Construction loans come in all sizes, with a variety of term lengths, interest rate types and down payment requirements.
Depending on the size of the loan, plan on putting between 5 percent and 20 percent of the home’s projected value down, says Jeremy Holmgren, Regional Mortgage Manager for Zions Bank. Just as you would go to the drawing board with your architect, map out your financial situation with your banker to find loan options that work best for you.
Construction Loan Fact #2
Save time and money with a one-time close construction loan. A one-time close loan lets you take out a single loan to cover all your new home costs – the land, the cost of construction, and the permanent loan amount. You only pay one set of closing costs and submit one loan document.
“A one-time-close construction loan is a popular option because it saves both time and money,” Holmgren says. With a Zions Bank one-time close loan, you can lock in an interest rate before construction begins. During the construction period you make interest-only payments on the amount drawn, then once the house is complete, the remaining loan becomes an adjustable-rate mortgage (ARM) loan, where the interest rate is fixed for a set period and then adjusted according to market conditions.
Construction Loan Fact #3
Pay less upfront with a construction-only loan. Unlike a one-time-close loan, a construction-only loan covers just the cost of construction. Once the home is built you’ll need to apply for a permanent loan separately. This usually means paying closing costs and filling out loan documents twice.
However, a construction-only loan can save you money upfront in the form of a smaller down payment. With a Zions Bank construction conversion loan, you have the option of converting the construction loan to a 30-year fixed mortgage once the home is complete.
Construction Loan Fact #4
You’ll need a plan to get approved. Don’t make the same mistake as the Blandings and alter your plans from renovation to demolition without notifying your banker. To get approval for your building project, you’ll need building plans, a construction contract and cost estimate, in addition to your income and financial information.
Construction Loan Fact #5
The bank takes care of disbursements. With most construction loans, disbursements to your builder are processed by your bank, so you don’t have to worry, like the Blandings do, about covering every request for money as it comes in. During construction, you make interest-only loan payments on the money you draw. Once the home is complete and construction costs are finalized, the remaining loan amount is amortized.
Construction Loan Fact #6
You don’t have to build right away. If you’re anxious to nab a desirable piece of land but not quite ready to build, a residential lot loan may be for you. A residential lot loan lets you buy land and hold it in preparation to build. With a Zions Bank residential loan, you can borrow up to 65 percent of the value of developed land.
At one point during the movie, Mr. Blandings asks his wife if the construction process is worth the trouble. “Of course it is,” she replies. “It isn’t a house we’re building, it’s a home.”
To get started on the home of your dreams, contact your nearest Zions Bank mortgage loan officer.
Loans are subject to credit approval. Terms and conditions apply. See a banker for details. Equal Housing Lender. NMLS #467014.