Among the most popular construction loan types for many borrowers is the one-time close construction loan, also known as the construction to permanent loan or all in one loan. It’s a home loan and construction loan wrapped into one loan.
How the One-Time Close Construction Loan Works
In general, you could pick from different mortgage types that the lender offers; adjustable rate home loan or a 15-year fixed rate loan for example. Some lenders would likewise allow you to lock a fixed rate, using the float-down option, which would enable you to get a reduced rate if rates fall, but you’d need to pay a fee. Additionally, you risk being penalized if your proposed construction phase lasts for more than 12 months.
This construction loan type is commonly interest-only, and you’d only be paying for money disbursed to you. This means that your loan payments also increase as the construction progresses and your lender releases more money for your use. Once you’ve completed the construction, your overall borrowed amount on the construction loan would automatically be converted to a permanent home loan.
If you locked in your rate, and you opted for the float down feature, you could pay your lender a fee to reduce your monthly mortgage payment. If you opted for an adjustable rate, however, you would be given the interest rate during the conversion of the construction loan to a mortgage, explains a loan officer from American Loans in Utah.
Is a One-Time Close Construction Right for You?
This type of construction loan is a viable option for you if you’re certain on the design, schedule, and costs of your construction since you can’t just change the loan terms. If you’re willing and able to weather the potential risks of increased rates and penalties, should something unexpected happens during construction, then a one-time close construction loan just might be right for you.
On the other hand, if you’re only looking for a home and don’t have the resources and energy to handle the construction of a home from the ground up, go for a typical home loan that you could comfortably afford.