There are some unions that finance home buyers or those who want to build their homes, and this funding is referred to as construction loans, which is usually a short term loan. These loans are given to people who are building their real homes or home buyers and not rentals. These loans are used to finance a building project before you get a long term funding and they are for a period of one year.
Interest rates of construction loans are always higher than the rates of permanent mortgage loans because they are considered riskier. According to the terms and conditions of construction loans, after the completion of the building project the home builder should get some other loan to pay this loan if they have not enough money to pay or refinance it to the level of a permanent mortgage loan and follow its criteria for payment. It follows that during the construction process, the borrower is supposed to pay the interest only until the project is completed so that the balance can be paid. Since the loan is purposely for construction of the owner’s real home, lenders have adopted a way of paying the contractors instead of giving the loan to the borrower directly. Usually money lenders pays the contractors as the work goes on until the last coin of the loan.
When securing a construction loan some lenders requires the borrower to have twenty to twenty-five percent down payment which is not very easy. In order to get this kind of loans, you must have an established good credit history or else it becomes very hard to get this kind of loans. The lender requires the full details concerning the building project from the borrower and also a guarantee that the contractor is experienced to do the project properly. Since this loans are very risky, Banks fear to give out money and instead these services are left in the hands of local unions and regional banks which are familiar with the area and knows at least some contractors.
Construction loans are the most optimum loans for those who intend to put up their own homes as it has many advantages, as explained below. According to the dictates of nature money has never lacked uses neither has anybody had had enough and therefore giving the borrower the full amount, the money can be diverted to other uses other than project construction hence paying the money to the contractor prevents this irregularity. These loans are effective when it comes to paying because the monthly installments required are low and affordable as the time to completely pay the loan is long enough. It is also advantageous because no tax is charged on the money payable to this kind of loans, therefore, keeping them affordable. The most important thing with construction loans is that their interest rates are based on the money market meaning when the market is high, the interest is lower.