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The Curious Bag
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A construction-to-permanent loan is a type of mortgage that allows a borrower to build his new home while financing the construction and permanent mortgage with one closing. This saves the borrower money by removing the need for two loan closings.
Significance
Prior to the introduction of construction-to-permanent mortgages, borrowers had to procure one loan for construction and a second for permanent financing. This new type of mortgage helped borrowers to lower their overall financing expense.
Function
A construction-to-permanent loan allows a borrower to build a house to her specific needs, as opposed to leaving the options up to a builder. This makes the borrower's new home unique.
Types
Many construction-to-permanent loans have one set rate for the construction term and another rate once construction is complete. Others, however, have a fixed rate throughout the entire life of the loan.
Considerations
A construction-to-permanent mortgage has a time limit on construction. Many lenders limit the building period to six months to one year.
Misconceptions
Many builders prefer clients with construction-to-permanent mortgages, because the risk of the loan is on the client and not themselves. However, the builder is liable if the construction is not completed on time.
Source:
TheFreeDictionary.com: Construction Financing
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