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You want your dream home to be exactly as you conceive it to be—but that dream has to begin with having the right financing. Two popular options for making that reality happen are one-time and two-time close construction loans.
They sound similar, but understanding the key differences between these options can help you decide:
1. Which one best suits your needs
2. Which one best matches your financial goals
So, what’s the difference between a one-time close construction loan and the two-time version? What are their benefits and drawbacks, and what should you consider before making a decision?
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What is a one-time close construction loan?
One-time close construction loans are also referred to as Construction-to-Permanent Loans. They can be highly useful, combining the financing for the construction phase and the following mortgage phase into a single loan.
With this loan structure, you’ll close only once, streamlining the process and reducing costs.
How it works
- Single approval process: With a one-time close construction loan, you undergo the approval process only once, covering both construction and permanent financing.
- Single closing: You sign the loan documents and pay closing costs upfront. This eliminates the need for a second closing once the construction is completed.Loan transition: During construction, the loan typically functions as a short-term construction loan—once the home is completed, it automatically converts to a standard mortgage loan.
Advantages of one-time close loans
- Convenience: The process is simpler and more streamlined since you only need one loan application and closing.
- Cost savings: You save on closing costs since there’s only one closing.
- Lock-in rates early: Many lenders allow borrowers to lock in their interest rate when approved, protecting against potential rate increases during construction.
- Reduced stress: Fewer moving parts make the overall experience less stressful, particularly for first-time home builders.
Drawbacks of one-time close loans
- Less flexibility: Adjusting loan terms after the closing can be challenging.
- Higher qualification standards: You may face stricter credit and income requirements since the loan covers a longer-term commitment.
What is a two-time close construction loan?
Two-time close construction loans are also known as construction-only loans.
This strategy requires two separate loan agreements: one for financing the construction phase and another for the permanent mortgage.
Each phase involves a separate application process, approval, and closing.
How it works
- First loan for construction: Covers the costs associated with building the home, generally a short-term loan for the duration of the construction process, often 6–12 months.
- Second loan for permanent financing: A second loan is needed to pay off the construction loan and transition into a standard mortgage once the construction is complete.
- Two closings: The closing process happens twice, once for the initial construction loan and again for the permanent loan.
Advantages of two-time close loans
- Flexibility: You can reevaluate your financial situation after the construction phase and potentially shop for better mortgage terms.
- Customizable terms: The separate loans allow for different terms for the construction loan and the final mortgage.
- Easier qualification for construction: Some borrowers find it easier to qualify for a short-term construction loan since the terms are limited to the construction period.
Drawbacks of two-time close loans
- Additional costs: With two separate closings, borrowers pay for additional closing costs, appraisals, and potential loan fees.
- Rate uncertainty: There’s no guarantee how rates might fluctuate after the construction phase; they could be higher when the time comes.
- Time-consuming: Managing two loan processes requires more time, paperwork, and coordination, which can add stress to the home-building process.
Differences between one- and two-time close construction loans
Here’s a direct comparison of the major factors for these two construction loan options:
Number of closings
- One-time close loan: For both construction and permanent financing
- Two-time close loan: For the construction phase, then for the permanent mortgage
Cost implications
- One-time close loan: Consolidates closing costs into a single event
- Two-time close loan: Involves duplicate fees for appraisals, closings, and other loan-related expenses
Interest rate lock
- One-time close loan: Offers the advantage of locking in your interest rate upfront, protecting you from rate hikes during construction
- Two-time close loan: Leaves your permanent loan rate open to market fluctuations, which could be advantageous or disadvantageous depending on rate trends
Flexibility
- One-time close loan: Provides less flexibility since changes to the loan terms after closing are difficult to make
- Two-time close loan: Offers the ability to reassess your mortgage terms after construction, allowing for adjustments if your financial situation or goals have changed
How to choose the right construction loan for your needs
Selecting between a one-time and two-time close construction loan depends on your financial goals, timeline, and preferences.
Budgeting and costs
Is minimizing upfront costs a priority? If yes, a one-time close loan may be the better option. Single closings save money on fees and make for simpler budgeting.
However, if you feel that shopping for a competitive mortgage after construction is worth the effort and expense, a two-time close loan could be worth it.
Interest rate environment
In a rising interest rate environment, locking in your rate with a one-time close loan can protect you from market volatility.
Conversely, if rates are stable or projected to decline, a two-time close loan might allow you to secure a lower rate post-construction.
Construction timeline
If your construction project is on a tight timeline or you prefer a streamlined process, a one-time close loan offers convenience and efficiency.
A two-time close loan provides greater flexibility if your project is complex or involves phased construction.
Benefits of working with MIDFLORIDA for your construction loan
Partnering with a trusted lender like MIDFLORIDA can make your construction process smoother and more manageable.
With the right guidance, competitive rates, and loan options tailored to your needs, MIDFLORIDA ensures you’re supported at every step of your home-building journey.
Ready to bring your dream home to life? Learn more about Construction Loan options at MIDFLORIDA or apply today using our online application.
Our dedicated team is here to help you choose the financing solution that’s right for you.
