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Purchasing a new home is no small decision. It often takes years to plan before you can finally have one. It takes a lot of different factors to consider before you can decide on which one to buy. Finances are also a huge consideration since mortgage payments are expensive, and you need to make sure that your budget can take care of it.

 

Another option for those who are dreaming of having a house of their own is building it. Many families choose to create instead of buying a finished one since they want it to look like the house of their dreams. Making this decision is even more tedious than purchasing one. There are more factors to consider here. You do not only find the budget, but you also have to consider your designer, contractor and many more.

 

When it comes to the financing of your new home, you can opt for a construction loan. There are also different types of new construction loans Texas, and it is best to learn about them before making your choice as it will affect your overall cost in the future. But before even going there, you need to familiarize yourself with what a construction loan is.

What is a Construction Loan?

Whenever you purchase a house, you take a mortgage loan. However, mortgage loans are not applicable when you are going to build a house. Instead, you take out what we call a construction loan. This type of loan is given too when you are renovating a house. When it comes to the terms, mortgage loans have longer terms while construction loans have shorter ones since they are considered as financial risks to the sponsor or the lender. And as such, they have higher interest rates too.

What is the Coverage?

Construction loans cover about everything. When you go for a construction loan, the price of the land may also get included if you don’t have it already. The expenses of closing the deal are also covered plus all building expenses. The lenders may also cover soft costs which are intended for work and land permits, mechanical engineering, and house plan design.

How Does It Work?

Unlike other types of loans where the capital amount is given to the borrower, construction loans work differently. The money is given to the contractor or builder instead. They are paid in installment basis depending on the finished phases of the project. Certain benchmarks are being followed as to when the money gets released. Once the construction is complete, the owner of the house is required to pay the loan in full. If he cannot, then the loan is converted into a permanent mortgage loan.

 

If you are interested in taking out a construction loan, you have to consider all the factors. One of the most important of which is your finances. If you are expecting money or you have money to pay the loan in full once the construction gets done then go for it. But if you are not yet sure about your finances, then it is better to choose a different type of loan.

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