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How Do Construction Overnight Loans Work?

May 26, 2008
Along with the choice of paint, carpet, cabinets, and door bell comes a whole slew of financial loan issues, when building your new home. Construction loans are used for those consumers building new home while currently owning their own home.

These construction loans allow consumers to use the equity in their house as collateral for their new home without making them sell their existing home to begin with. The equity in your current home is just a fraction of your total loan package.

A down payment and other construction costs that must be borrowed are also included in the total cost of the new home. When you are looking for a new construction loan, the idea of shopping around can't be stressed enough. Banks are just like any other store, and they want to sell their products for a profit.

Construction loans are much trickier than regular mortgage loans and it is important to know how to read and understand the terms, as you will be applying for more than one loan from all different lenders. You will most likely wan to discuss the interest rate with your lenders. You will want a fixed rate that will last the whole duration of the loan.

If interest rates will rise while you build your home, you will want to lock in a rate now. If they will fall, you should relax and wait until closing to lock in a much better interest rate. Remember that even a small difference in interest rates can make a huge difference in the amount of interest you will pay over the duration of the home loan.

Once you have secured a construction loan with your lender, they will have a total amount allowed for building. It is advised that you have at least an extra five percent for building than your bid requires. This allows for any extra building costs that may come up that you would usually have to pay out of pocket for.

While your home is being built, your sub contractor will be drawing money out of the account to pay the contractors building your home. You will be required to make interest payments on the money being drawn from the account. These payments will get bigger as the home continues to be built.

Once the home is completed and the money is gone, your construction loan will be turned into a regular mortgage loan. You will close on your home and if you bargained well in the beginning, you should have a great competitive interest rate on your new home.

If you want to avoid the risk of owning your home while building another new home, you can consider selling you current home before you begin building the new home. This way, you will know exactly what numbers you will have to use as a down payment, and you won't have to worry about selling your current home when you are moving.

When you are looking for your next construction loan, it is important to use a lender that has experience. Some lenders advertise that they have construction loans, but you should consider using a lender with a specific new construction loan officer. They should have at least five years experience and they will know how to get you a great interest rate.
About the Author
Mike helps people who need a medical loans or who need patient medical loans .
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