Building a custom home is an exciting journey, but it can also be a complex and confusing process, especially when it comes to financing. As a home builder serving the Rexburg, Rigby, Idaho Falls, Ammon, Shelley communities across East Idaho, MDS Homes understands the importance of making the right financial decisions when building a new home. After all, it is the largest expense associated with your new build. In this blog, we will discuss two of the most common ways to finance a custom home build: one-time close home construction loan and conventional construction loans.
One-Time Close Construction Loans
One-time close construction loans, also known as single-close loans or construction-to-permanent loans, are a popular option for financing a new custom home build. As the name suggests, this type of loan is a single loan that covers both the Construction Financing and the long-term mortgage for the completed home.
Benefits of One-Time Close Construction Loans
Simplicity: One of the biggest benefits of a one-time close construction loan is the simplicity it offers. With a single loan, there’s no need to worry about obtaining multiple loans or refinancing once the construction is complete.
Savings: By combining the construction loan and the long-term mortgage into one loan, borrowers can often save money on closing costs compared to obtaining separate loans.
Predictability: With a one-time close construction loan, borrowers have a clear understanding of the interest rate and monthly payment for the life of the loan, allowing them to budget and plan accordingly.
Drawbacks of One-Time Close Construction Loans
Higher Interest Rates: Although one-time close construction loans can offer savings on closing costs, they often come with higher interest rates compared to traditional mortgages.
Strict Guidelines: One-time close construction loans typically have strict guidelines, including higher credit score requirements and larger down payment requirements, making them less accessible to some borrowers.
Conventional Construction Loans
Conventional construction loans, also known as two-step loans, are a type of financing that requires a separate loan for the construction costs and a separate mortgage for the completed home. This type of loan is typically obtained through a bank or other financial institution.
Benefits of Conventional Construction Loans
Lower Interest Rates: Conventional construction loans often have lower interest rates compared to one-time close construction loans, making them a more cost-effective option for some borrowers.
Flexibility: Conventional construction loans offer more flexibility in terms of down payment requirements and credit score requirements, making them accessible to a wider range of borrowers.
Separate Appraisals: With conventional construction loans, the completed home is appraised separately from the construction costs, providing a more accurate valuation of the completed property.
Drawbacks of Conventional Construction Loans
Complexity: With two separate loans and the need to refinance once the construction is complete, conventional construction loans can be a more complex and time-consuming process compared to one-time close construction loans.
Additional Closing Costs: With two separate loans, borrowers will incur additional closing costs compared to one-time close construction loans.
Uncertainty: Because the long-term mortgage is obtained after the construction is complete, borrowers don’t have a clear understanding of their monthly payment and interest rate until the refinance process is complete, leading to uncertainty and potential budgeting challenges.
In conclusion, both one-time close construction loans and conventional construction loans have their own set of benefits and drawbacks, and the best option for financing a custom home build will depend on your individual circumstances and financial goals. MDS Homes works closely with knowledgeable and experienced local banks and credit unions and can connect you with qualified Loan Officers.
In conclusion, financing a custom home build can be a complex process, but with the right information and guidance you can make the best choice for your new home build!
