What is a Construction-to-Perm Loan?

A construction-to-permanent loan (often called a "construction-to-perm loan") is a type of mortgage that covers both the construction of a home and the permanent mortgage once the home is completed. Instead of taking out separate loans for the construction phase and the permanent mortgage, this loan combines them into a single loan process with one set of closing costs.

Key Features of a Construction-to-Perm Loan:

1. One Loan, One Closing:

   • The borrower only goes through one application and closing process, which saves time and reduces costs.

2. Two Phases:

   • Construction Phase: Funds are disbursed in "draws" as the construction progresses to pay contractors and suppliers. During this time, borrowers typically pay interest-only payments on the amount drawn.

   • Permanent Mortgage Phase: Once the home is completed and a certificate of occupancy is issued, the loan converts into a standard mortgage with regular monthly payments (principal and interest).

3. Fixed or Adjustable Rates:
   Borrowers can typically choose between fixed-rate or adjustable-rate mortgage options once the loan converts to the permanent phase.

Benefits of a Construction-to-Perm Loan:

• Convenience: One loan for the entire process means fewer headaches and paperwork.

• Cost Savings: Only one set of closing costs instead of two (as with separate construction and mortgage loans).

• Rate Lock: Some lenders allow borrowers to lock in their interest rate at the beginning of the loan, providing stability during construction.

• Simplified Budgeting: Payments during the construction phase are usually interest-only, making them more affordable.

Considerations and Potential Challenges:

• Down Payment: Construction-to-perm loans often require a larger down payment (typically 10% to 20%) compared to standard mortgages.

• Approval Requirements: Lenders may have stricter approval criteria, requiring detailed construction plans, timelines, and budgets from reputable builders.

• Interest Rate Changes: If rates increase significantly during construction, borrowers without a rate lock could end up with higher mortgage payments once the loan converts.

When to Consider a Construction-to-Perm Loan:

• If you’re building a custom home and want to streamline the financing process.

• If you prefer to avoid the hassle and cost of securing separate loans for construction and a permanent mortgage.

• If you want to lock in your mortgage rate early for peace of mind.

In summary, a construction-to-perm loan simplifies the home-building process by providing a single financing solution for both the construction and the long-term mortgage, making it an attractive option for those building a custom home.