While most people understand how a traditional home loan works, if you’ve never built a home yourself, you may not know anything about construction loans for custom home builds. Our home builders here in Watkins at New Frontier Homes can help you to navigate the world of custom home financing which can include construction loans. To learn more about home construction loans, keep reading. Once you learn everything you need to know, be sure to contact us for all of your home construction needs in Watkins.

The Fundamentals Of Home Construction Loans

Your Construction Loan Is Similar To A Credit Card

While a traditional home loan is the amount that you pay for the total cost of your home, a home construction loan is what you use during the home building process to pay for the construction of your home. A construction loan will only last for the amount of time that it takes to complete your home building process, which is generally around 12 months. Your home construction loan essentially works as a line of credit. A home construction loan works similarly to a credit card, in that, if your loan is for $300,000 and your home builder only needs $20,000 to start, you will only pay interest on the $20,000 that has been used. You also are not required to use the full amount of your home construction loan.

What To Do When Construction Is Over

Once you complete the construction on your home, you will then get a mortgage to pay off the costs of your home build and your construction loan. If you only used $250,000 of the $300,000 that you were granted for your home construction loan, then you will only have to get a mortgage for $250,000.

A One-Step Construction Loan

A one-step construction loan refers to when you use the same lender for your construction loan and your mortgage. For a one-step loan, you will fill out the paperwork for your construction loan and your mortgage at the same time. You will also close on your construction loan and your mortgage at the same time, which means that you will not have any wiggle room in your construction loan since you’ve essentially closed on the amount of the loan and the mortgage.

A Two-Step Construction Loan

A two-step construction loan is when you wait to get your mortgage until after your home is built. This is generally what people use when building a custom home so that they can keep the terms of their construction loan open while their home is being built. Because custom homes are subject to changes and the price can go up or down depending on a myriad of factors, a two-step loan is suggested for custom home builds.

Here at New Frontier Homes, we can help people with the entire home building process including your financial planning and obtaining a home construction loan. If you’d like to begin your custom home construction in Watkins, call New Frontier Homes today to learn more about our home building services.