Hello and Welcome to another chapter in construction lending. In this video we will give an overview about construction lending in general, a comparison to permanent loans, and a helpful discussion on the differences between the One time and Two time close construction loans.
So first, let’s talk about the general parameters of a construction loan.
A Construction loan is a short term loan that is used to pay for the construction of a project, in our case, a residential house. Because the collateral has not been built yet, the proceeds from the construction loan are disbursed gradually as the home is built. Basically the construction loan acts as a big line of credit. Before the project starts, there is a zero balance. But as the lot is acquired, the foundation is dug and poured, and work commences, money is disbursed from the loan to the subs and suppliers to pay for the work. As more work is done, the balance of the loan climbs. When all the work is done, and all the bills are paid, the final balance will get paid off by your long term loan.
Interest on a Construction loan also works just like a line of credit—you only pay interest on what you use, and when you use it. For example, if you borrow 25,000 the first month for work on the house, your interest is just on that balance, not the entire amount of your construction loan. Also, the interest payment usually isn’t due each month, but gets paid out of your construction loan, just like a bill for the house. This is so it is not cumbersome for those still selling their current residences to make two payments.