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California Construction Loan "Inside Secrets"

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Which lenders/banks have the best construction loans?

There are plenty of banks willing to lend money for mortgages, refinancing, home equity loans and every other type of loan. But if you're planning on building a new home, where can you obtain the best construction loan with the most competitive rates and pricing?

More importantly what are the characteristics of a good construction loan?

The next time you have some spare time, pull out the yellow pages and start calling your local banks and ask for the construction loan department or a construction loan officer.

99.9% of the time the person on the other end of the phone (assuming you actually get a human being) will rarely be able to direct you. If you do find a bank that provides construction loans, they usually only offer one product line that may or may not be competitive in today's marketplace.

Below are the various ways lenders/banks offer construction loans. It is very important to note that construction loans are very different than conventional home loans in that there is a construction period at the start of the loan, usually between (6 to 24 months).

The reason that understanding this important part of the construction loan (build time) is because there is always a cost to the lender/bank for providing this phase of the loan along with the rate lock. This cost assuming if you want to lock your long term rate upfront will be passed onto you, the consumer, in one way or another.

Below are two of the most common types of construction loans.

Lock into today's interest rate upfront construction loans; some lenders/banks can offer you today's construction loan rates upfront. The rate during the construction period is going to be the same interest rate (or close to it) into the permanent part of the loan. An example would work like this. Let's say you wanted a thirty year construction to perm loan.

The first 12 or 18 months would be the construction loan period and once the home is completed this loan would automatically convert into the permanent part of the loan at the same rate you locked into upfront. If rates go through the roof you will not have to worry because you would have locked in your interest rate in advance. The cost for locking the interest rate upfront can range in the form of higher lock in rates, fees or a combination of both. By the way if the rates go down by time you complete your new home some lenders have a float down option with the interest rate with no additional cost to you.

The Prime Rate adjustable construction loan, Some lenders/banks offer an adjustable Prime Rate based construction loan while building. This is actually a great way to go if the prime rate is low or heading downward. Another advantage is that most lenders will provide rates below the prime rate since the lender does not have to worry about the cost of locking in the rate a year in advance.

So for example the lender will offer a half of a point below the prime rate during construction. So if the prime rate is 5.00%, a half a point below prime would be the construction loan rate of 4.50%.

There are three reasons you would want this type of construction loan.

  1. If rates are expected to improve over the next year.
  2. If the prime rate is expected to go lower.
  3. If the upfront lock in costs are too high.

The most important thing when searching for a good construction loan is to find an experienced construction loan specialist that knows which banks offer the best loans to fit your exact needs.

Today's construction loan choices include the 30 year fixed, 15 year fixed, 1 year ARM, 3/1 ARM, 5/1 ARM, 7/1 ARM, 10/1 ARM and don't forget the popular interest only loans.

The most popular construction loan today is the "One Time Close" but not all are created equal. Just like any product there are the best loans, good loans and downright bad loans.

With today's technology you now have the ability to obtain a construction loan from the best banks in the country and sign your loan documents at your local title company or escrow office. This benefit allows you to have the most competitive construction loan available.

The graph below shows the type of loan you should apply for depending on your needs.

Which loan is right for me?
Years
in the house
Recommended Program
1 - 3 3/1 ARM, 1year ARM or
6 month ARM
3 - 5 5/1 ARM
5 - 7 7/1 ARM
7 - 10 10/1 ARM, 30 year fixed or
15 year fixed

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