Construction-to-Permanent Mortgages

Construction-to-permanent mortgages help pay for building expenses.

A construction-to-permanent mortgage consists of a construction loan and a mortgage. It provides funding for homeowners who wish to build their own properties. After the completion of construction, these loans become regular mortgages. Construction-to-permanent mortgages have several advantages, but homeowners also take on some risks.

Construction Loan

The construction loan portion of a construction-to-permanent mortgage covers the expenses the homeowner incurs when building the property. Because construction costs may vary from the amount initially projected, the lender may adjust the amount of the loan. The homeowner is likely to spend money on unexpected expenses during construction as well, so the lender may make it easier for the homeowner to make his payments by only requiring him to cover the interest expense.

Permanent Mortgage

Once the construction project is complete, the construction-to-permanent mortgage becomes a conventional mortgage. At this stage, the homeowner may have to start making larger regular payments because he has to pay both the interest portion of the loan and the principal balance. The homeowner may be permitted to pay off the construction loan portion to reduce his balance.

Benefits

Instead of having to obtain separate financing for the construction and the mortgage, the home buyer only has to get one mortgage and negotiate with one lender. The home buyer only has to qualify for a loan once and pay closing costs once, saving him time and money. During the construction stage, the lender helps make sure the contractor does his job by arranging the payment schedule so the contractor only gets paid when he reaches new milestones.

Risks

The home buyer risks spending more on a construction-to-permanent mortgage compared to two separate loans. The construction-to-permanent mortgage limits his options since he cannot shop for other mortgages once construction ends. Secondly, the permanent mortgage interest rate quoted at the beginning of construction may change by the time the property is built.

References

• Schwab Bank: Construction-to-Permanent Loan Information
• Construction-to-Perm.com: About C/P Loans
• "The Mortgage Professor"; Pitfalls in the Financing of Home Construction; Jack Guttentag; 2006