Building a custom home is a significant milestone. While the process can feel daunting, it doesn’t have to be – especially when it comes to managing the finances of your construction. Construction-to-permanent loans remove the financing complexities by combining construction funding and long-term mortgage financing into one streamlined solution.

A construction-to-permanent loan is a unique financing option that allows homeowners to fund the construction of their new home and automatically convert the loan into a permanent mortgage once construction is complete. This type of loan simplifies the borrowing process by combining two loans into one, saving homebuyers time and money.

How It Works: A Phase-by Phase Breakdown

APPLICATION & LOAN APPROVAL
When applying for a construction-to permanent loan, borrowers secure a single loan that covers both the construction phase and the permanent mortgage. This means there is only one closing process, which saves homebuyers money on closing costs compared to obtaining separate loans for construction and the permanent mortgage.

CONSTRUCTION DRAWS & PAYMENTS
During construction, funds are disbursed in stages known as “draws” based on the progress of your home build. After each stage of construction, lenders provide funds to your builder to continue progress on your home. Lenders typically require inspections to ensure that work has been completed before releasing additional funds. This removes the hassle of managing builder payments and keeps your project moving seamlessly.

During the building process, borrowers make interest-only payments on the amount disbursed so far during construction – instead of paying towards both principal and interest. For example, if your total loan amount is $500,000 but only $200,000 has been drawn for initial construction costs, interest payments are calculated based on the $200,000 draw until more funds are drawn.

CONVERSION TO PERMANENT MORTGAGE
Once construction is complete and all inspections are passed, the construction loan automatically transitions into a permanent mortgage. With no second closing, borrowers begin making monthly mortgage payments that include both principal and interest over a typical term of 15 to 30 years.

A construction-to-permanent loan offers convenience and cost-efficiency—but choosing the right lending partner makes all the difference. Before breaking ground, contact a lender to see if a construction-to permanent loan is the right fit for you. Local lenders can be key players in removing the complexities, stress and added expenses from your project.

Provided by Coastal States Mortgage