If you’re looking to build or renovate a home, you are often required to take out a construction loan. There are two types of construction loans. The difference depends on whether you want to pay for the home by the time it’s completed (the one-time close loan), or whether you want to pay off the costs like a traditional mortgage thirty years down the line (the two time close construction loan).
To use an example, let’s say your home is going to take two years to build. The one-time close loan will be paid back in 24 monthly payments, after which you can get a traditional home loan, whereas the terms for a two time close construction loan will be set once before you start construction, and again after construction is completed.
The Basics
It’s called a two-time construction loan because you get to negotiate the terms of the loan twice – once when construction begins, and once when construction ends. This ensures that if construction costs go over budget, you can recalibrate the loan payments during the second close, so you don’t have to worry about going broke building your house. Many people also use this second close to refinance into a new loan with a better rate.
There are many factors that might go into choosing two time close construction loans. It’s obviously cheaper in the short-term, which can be a boon to people who don’t have a lot of money but who want a home of their own. The one time close loan often requires as much as a 20% down payment, which can be more money than you have if your construction costs run into the hundred thousands. On the other hand, it requires a greater commitment to your house. We all know what happened when people took out mortgages they couldn’t afford – they foreclosed on their homes and ended up on the street. So you want to be wise when it comes to choosing your home loans. Likewise, the total cost to you is going to be greater for the two time close loan, simply because you’ll end up paying more in interest, and there are greater costs associated with two loan closes as opposed to a simple all-in-one loan close.
Finding the Right Lender
Before signing into a two time close construction loan agreement with your banker, you need to make sure that they have your best interests in mind. Many predatory lenders will use the prospect of a two time construction loan as a hook to lure unsuspecting homebuyers who really don’t have the capital income to purchase a home. Be sure to ask questions like, “What happens if my end loan falls through and I can’t get approved again?” to gauge how willing your banker is to work with you.
When Are They Used?
Two time close construction loans are most often used for large commercial building projects, which require so much capital that building costs can’t be paid before construction is completed. However, many individuals have reported that these loans have been very useful for them, especially when mortgage rates are somewhat erratic. They use the first loan to make sure they don’t go over budget with home construction costs, then use the second loan to lock in a more traditional mortgage loan with better rates. It all depends on what your family’s financial situation is.
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