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What You Need to Know About New House Construction Loans

By Brown Ezilon.com Articles Published 06/5/2011 | Construction Loans

New house construction loans are quite different to loans used to buy a home that has already been constructed and are referred to as refinance loans. Mortgages are also loans you can apply for to buy already existing properties and these kinds of loans use homes as a guarantee for the payment of the loan. This means that if you do not pay the payments that are scheduled by the repayment plan, the bank automatically becomes the owner of your house and can sell it to reclaim the payment of the loan.

Construction loans are different because in this case there is no house to use as collateral in case the payment is not made. Unfortunately a mere signature will not suffice to receive money and begin construction; the loan will be disbursed according to a schedule that has been planned before hand by the loaning company.

Usually new home construction loans are disbursed in payments of twenty-five percent. After the first disbursement the loaning company will verify if you have completed twenty-five percent of the construction work before handing out the second part of the loan to continue with construction work.

The good news about new home construction loans is that you only start the repayment process once the original disbursement is made. Once you have the integrity of the sum then only interest payments are due on the loan and you will only be paying interests on the portion of the loan that has been handed over to you.

As you progress with construction work the loan payments will be handed over and this will increase the monthly payments accordingly. The interests increase as the amount of the loan increases with the various disbursements. You will have to refund the total balance of the new home construction loan once the construction has been completed.

This should not be a problem as you have a way to pay back the total balance well in advance. You will be able to do this as before your new home construction loan is approved the loaning company will have asked you to approve for mortgage. A letter will be requested to the mortgage loaning company to provide assurance the new home construction loaning company will need for approving the loan.

By the time you have finished your new home the mortgage will be used to help pay back the balance of the new home construction loan. You can of course choose between a one or two-time to complete the new home construction loan. The difference between the two loans is the period at which the interest rate is settled. If you choose the one-time closing type of loan then this means that loans, the construction and mortgage will close simultaneously and fix the interest rate for both. With the two-time closing type, the firs to close will be the construction loan followed by the mortgage, which will close once the construction is completed.