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Understanding How a Construction Perm Loan Works

March 21, 2020
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Most people are familiar with the typical mortgage loans involved in the purchase of an existing home. However, when you commit to building a home from scratch, there are construction loans that are also needed to finance the building process. These loans are in addition to a regular mortgage. If you’re considering working with a builder like Pacific Lifestyle Homes to build one of the new homes in Puget Sound WA from the ground up, then it helps to understand how a construction to permanent (construction perm) loan works.

Essentially, a construction perm loan is a combination of two loans: one for the construction and one for the mortgage. The money for the construction is advanced to the builder/contractor in stages during the construction process. When the home is complete, the remaining balance of the loan becomes the permanent mortgage.

Because the construction perm loan is ultimately just one loan, there are fewer fees involved and less stress trying to take out separate loans. The buyer only has to submit credit reports and other financial documents once, and there is only one closing, which can save a considerable amount of money

However, there are some variables to keep in mind. Typically, a construction perm loan requires a down payment of at least 20 percent of the estimated total. During construction, the homeowner only pays the interest on the outstanding balance of the loan. However, the interest rate on these loans is variable during this phase. This means you have to be prepared to deal with increases and decreases in the rates during the construction period, which can be challenging, especially if the construction takes longer than expected.

Once construction is completed, the construction loan will be converted into a permanent mortgage by the mortgage lender. At this point, the home buyer can choose a 15- or 30-year mortgage with a fixed or adjustable rate, depending on their preference. In many cases, the mortgage lender will agree to lock in the interest rate of the mortgage once the actual construction begins.

This kind of loan is attractive because the buyer only has to deal with a single loan transaction for the entire process of building one of the new homes in Puget Sound WA. The savings in time and money by avoiding separate loan transactions and their associated costs and paperwork make the construction perm loan an appealing option.

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