Would it be better to get a constructon loan to cover purchase price and home improvement than a reg mortgage?

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I’m asking because it seems more logical to get try to get the construction loan because you can cover the purchase and draw out for home improvements and won’t be charged until you draw.

  1. Reply
    February 5, 2011 at 5:42 pm

    I think it depends on the appraised value of the house and the appraised value of repairs on whether you qualify or not. If you qualify go for it, it seems to be more reasonable, you may not get as good of an interest rate though. All depends on your credit.

  2. Reply
    February 5, 2011 at 6:30 pm

    I think you’re right on about the construction loan because you typically only pay interest on what you draw (although you will have some other fees) and it is a form of a note so you can establish the time (3, 6, 9, 12 mo) of months in which to pay it off. At the end, you can always roll it into a permanent mortgage loan. Now if you’re not out to try and pay on it before the note expires, then it might be better to get the home improvement loan and save additional fees by doing so. Call some banks and ask them. Good luck.

  3. Reply
    February 5, 2011 at 6:34 pm

    It definately depends on the cost of improvements and the equity you would have in the home once you purchased it. Some construction loans are two step loans, where you have a construction loan that you have to replace by a permenant loan once improvements are completed. This is usually more expensive due to two closings.
    There is also a one step construction loan that automatically converts to a permenant loan once construction is completed. This will usually carry a slightly higher rate (+0.5% or so) than a conventional mortgage.

    Another option, if you have enough equity in the home after purchasing with a conventional mortgage, would be to consider an Equity Line of Credit. Then you will only pay on the amount you actually use and you can have more control over how money is dispursed (rather than the lender controling the draws). You can use the line for however many projects you want to do because as you pay it off you increase you available balance back to original amount. Lines of Credit usually are at low or no fee, but will generally carry higher rates, as they are second mortgages and usually tied to Prime Rate. Check you local banks for these options and what would be the best for your scenerio.

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