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Construction loans can be a great way to help you achieve the goal of building your dream home. Construction loans are typically a 12-month line of credit. Funds are disbursed from this line to pay the contractor to build your home. During this construction period, you are only required to pay the monthly interest, which is based on the principal amount of the loan. Once the construction of the home is completed, the construction loan will either be converted to a traditional mortgage loan, or it will need to be refinanced into a mortgage loan. This depends on what type of loan you have.

The two most common types of construction loans are the Two-Close Construction loan and the All-In- One Construction loan.

The Two-Close construction loan works where there is one loan for the construction of the home. Once construction is complete, you would refinance the construction loan into a mortgage loan. Some of the benefits of this type of loan is that the rate on the construction only loan is typically lower than the All-In-One and there is a possibility of getting a lower rate on the mortgage loan. This depends on what rates do.

The All-In-One construction loan works just like it sounds. There is one loan closing for both the construction and mortgage loans. With this loan, at the end of the 12-month construction period the loan automatically converts into a mortgage loan. Unlike the Two-Close construction loan, there is no need to refinance and go through the application process again. The rate you have during construction is the same rate you will have for the mortgage loan.

Construction loans have their own unique set of qualification standards. If you plan on building a home, please reach out to your lender for details.

Michael Scharfe has been a lender at First Security Bank for 10 years. Reach him at [email protected].