How Do New Home Construction Loans Work?

Every year, more than 5.34 million homes sell to new owners. But what if you don’t find a pre-built home that fits your needs? You can always build a custom home. To fund that project, you’re likely going to need to explore your options for new home loans. Here’s how those construction loans work.

They Fund the Build

Traditional mortgages fund the purchase of a house. New home loans fund the construction and everything that’s involved in that process. This means you can use the loan to pay for the contractor, the cabinets and structural furnishings, and all the components necessary to complete the structure of the house.

Stand-Alone vs. Construction to Permanent

There are two main types of construction loans: stand-alone and construction-to-permanent loans. Stand-alone new home loans cover the construction costs and nothing else. You’ll need to secure a traditional mortgage after the construction is over. Construction-to-permanent new home loans cover the construction costs and then transition into a traditional mortgage to help spread out the costs over time.

Which Is Best for You?

Construction-to-permanent new home loans mean you won’t have to worry about applying for a separate mortgage after construction. Stand-alone loans can save you money upfront, as you’re only expected to pay for the interest earned on the loan during construction. However, you may have to pay more in loan origination fees and can’t guarantee that you’ll be able to get a low interest rate for the new mortgage.