This blog is for educational purposes only, not an offer of credit or advertisement for current loan terms. It does not provide legal advice. Refer to our loan web pages or consult professional advisors for specific information.
Building a new home from the ground up takes a lot of skill and knowledge—but the same applies to financing that construction.
Standard mortgages will not work when building a home from scratch, so you’ll likely need a construction or Construction-to-Permanent Loan.
While these loans both support the building process, they differ in:
- Structure
- Timing
- Financial impact
Let’s explore the key differences between construction vs. Construction-to-Permanent Loans to help you select the best option.
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What is a construction loan?
Construction loans are almost always short-term arrangements specifically designed to fund the building of a home, typically spanning only 6 to 12 months, which are the most common construction periods.
Once the construction is complete, borrowers are responsible for securing separate financing to pay off the construction loan.
Construction loans: How they work
- Purpose: Funds cover labor, materials, and other home-building costs.
- Disbursements: The lender provides funds incrementally, known as “draws,” based on construction milestones such as foundation completion, framing, or finishing
- Payments: Borrowers typically make interest-only payments during construction based on the amount disbursed.
- End-of-loan requirement: At the end of construction, the loan balance must be paid off in full, usually by converting it into a separate mortgage.
Advantages of a construction loan
- Flexibility: Borrowers can choose a new permanent mortgage lender after construction.
- Customization: Offers funding tailored to the specific needs and timeline of the construction process
- No long-term commitment: Allows for short-term borrowing, giving borrowers the option to refinance after construction
Drawbacks of a construction loan
- Additional closing costs: Since a new mortgage is required after construction, borrowers face two sets of closing costs.
- Rate uncertainty: Interest rates for the final mortgage are not locked in during the construction phase, leaving borrowers vulnerable to rate fluctuations.
- Complexity: Managing two separate loan processes can be time-consuming and stressful.
What is a Construction-to-Permanent Loan?
A Construction-to-Permanent Loan—also known as a one-time close loan—combines construction financing and permanent mortgage into a single loan agreement.
There’s a simpler loan process here because you transition automatically into a standard mortgage once construction is complete.
Construction-to-Permanent Loans: How they work
- Purpose: Covers both the construction costs and the long-term mortgage for the finished home
- Disbursements: Similar to construction loans, funds are disbursed incrementally during construction.
- Payments: Borrowers may make interest-only payments during construction. Once the home is completed, the loan converts into a traditional mortgage with fixed monthly payments.
- One closing: Borrowers only close on the loan once, consolidating all fees and paperwork into a single transaction.
Advantages of a Construction-to-Permanent Loan
- Streamlined process: One approval, closing, and loan for construction and permanent financing.
- Cost savings: Consolidating the construction and permanent financing eliminates the need for multiple closings, reducing fees.
- Rate security: Many lenders allow borrowers to lock in their interest rate during approval, protecting against market fluctuations.
- Simplicity: Managing a single loan throughout the process reduces stress and paperwork.
Drawbacks of a Construction-to-Permanent Loan
- Less flexibility: Adjusting loan terms or switching lenders after construction is more difficult.
- Higher upfront requirements: Borrowers may face stricter qualification criteria than a standalone construction loan.
Construction vs. Construction-to-Permanent Loan: key differences
Understanding the distinctions between construction loans and Construction-to-Permanent Loans is the best way to determine the best option for your homebuilding project.
Loan structure
- Construction loan: Two separate loans—one for construction and one for the permanent mortgage
- Construction-to-Permanent Loan: A single loan that covers both the construction and long-term financing phases.
Number of closings
- Construction loan: Requires two closings, the first for the construction loan and the latter for the permanent mortgage
- Construction-to-Permanent Loan: Involves a single closing that consolidates all costs
Flexibility
- Construction loan: Offers more flexibility to shop for a new mortgage lender after construction
- Construction-to-Permanent Loan: Provides less flexibility but simplifies the process
Costs
- Construction loan: Incurs higher overall costs due to two sets of closing fees and potential rate changes
- Construction-to-Permanent Loan: Saves money by combining closing costs into one transaction
Rate lock options
- Construction loan: Rates for the permanent mortgage are determined after construction, which can result in uncertainty.
- Construction-to-Permanent Loan: Often allows borrowers to lock in their rate at the start, offering stability.
How to choose the right loan for your home project
Selecting between a construction loan and a Construction-to-Permanent Loan depends on your financial situation, preferences, and long-term goals.
Your financial flexibility
If you want to shop for competitive mortgage rates after construction, a standalone construction loan may be the better choice.
However, if cost savings and simplicity are your priorities, a Construction-to-Permanent Loan offers significant advantages.
Interest rate environment
Locking in your rate with a Construction-to-Permanent Loan can provide peace of mind in a rising interest rate environment.
On the other hand, if rates are stable or expected to decline, a construction loan may allow you to secure a better rate post-construction.
Construction complexity
A Construction-to-Permanent Loan offers convenience and cost savings for straightforward projects with predictable timelines.
More complex projects may benefit from the flexibility of a construction loan, which can adapt to changing circumstances.
Why MIDFLORIDA is the right choice
Whether you’re considering a construction loan or a Construction-to-Permanent Loan, financing with MIDFLORIDA ensures you’ll receive handy advice and support at every step.
As a trusted credit union with deep roots in the Sunshine State, MIDFLORIDA understands the unique needs of homebuilders and offers personalized solutions tailored to your project.
Competitive rates
MIDFLORIDA provides competitive rates and terms, helping you afford your dream home. You can confidently build your home with options like rate locks and streamlined approval processes.
Comprehensive support
From selecting the right loan type to navigating the construction financing process, our team of professionals is dedicated to making your experience as seamless as possible.
Start your application today
Ready to take the first step toward building your dream home?
Explore your loan options at MIDFLORIDA or start your application today with our online form.
Let MIDFLORIDA help you build the future you’ve envisioned.
