Construction & Interest Only Loans

Construction & Interest Only Loans

As our housing market continues to bounce back from the most recent economic recession, there has been a sharp increase in new construction homes again.  This has lead to the popularity by consumers who are in need of construction loans.  A construction loan does not have your typical terms that one would find in a conforming loan; rather it is structured similarly to an interest only loan.  I will briefly discuss both loans. 

Construction Loan:

construction loans property guidingWith a construction loan the amount borrowed is for financing the cost of the new construction.  It is not for financing the home itself.  Therefore, this loan differs from what one would conceive as a typical home loan.  This is because a construction loan is only a temporary loan while the home is being constructed.  The money needed to build the home is paid to the contractors themselves in installments as the work is completed.  During this loan period, only the interest on the loan is paid.  There is no principal to be paid because it is an interest only loan.  There are no taxes collected because it is a temporary loan, and insurance isn’t collected because land can not be insured.  Once the home is complete, the homeowner then normally obtains a fully amortized traditional loan.

Interest Only:

An interest only loan is simply a loan that one can choose to pay only interest on.  The common notations for this type of loan is 10/30 I/O; meaning for the first 10 years only interest is required to be paid, and then the next 20 years there are fully amortized payments.  This type of loan is common for consumers to experience what is known as payment shock.  This is because they become custom to the lower payment amount, and then the loan will adjust to fully amortize, and the consumer is burdened with a higher unexpected payment.  It is important to note, interest only loans have lower initial payments; however, they come with higher interest costs over the term of the loan.  This type of loan is usually common for a consumer who expects their income to increase, or for someone who doesn’t plan on remaining in the loan long term.

Not sure who to call or where to start? Contact me today for a 100% free no-obligation loan inquiry analysis.

Matt Pell,  Loan Officer
Mortgage Warehouse, LLC
(239) 672-8502 – Direct Line
(239) 344-9223 – Fax
Company NMLS ID – 137154
Individual NMLS ID – 1018529
Better Business Bureau Rating = A+

Posted on October 7, 2013, in Finance and tagged , , , , , , , , , , , , , , . Bookmark the permalink. Leave a comment.

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