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What's the Difference between a Construction Loan and a Mortgage Loan?

If you’re considering building your dream home instead of purchasing an existing house, you’ll need financing. The whole thing can be confusing and more than a little intimidating.

Do you need a mortgage? A personal loan? It’s hard to know where to start. What’s tricky is that you’re asking for financing for something that doesn’t actually exist yet. It requires something different than a traditional mortgage. Trying to find land, a builder, and all the other things that are necessary for building a home gets crazy enough. You don’t need to be confused about the type of loan you need too. To help simplify the situation here are a few differences between a construction loan and a mortgage:

What is a Construction Loan?

A construction loan, is a short-term loan that’s designed specifically for building a home or some other real estate project. Essentially, the owner takes out a loan to cover the cost of the project. After construction is complete, the borrower usually refinances the loan into a longer-term loan or gets a new loan to pay off the construction loan.

What is a Mortgage?

Mortgages are typically long-term loans ranging anywhere from 5-30 years. Mortgage payments consist of payments on the principal or the original amount borrowed, plus whatever the interest rate is for your particular loan.

What's the difference between a Construction Loan and a Mortgage Loan?

There are a few specific differences between mortgages and construction loans. Construction loans are short-term—usually no more than a year. They are typically interest only payments based on the amount you have advanced on your loan.  Mortgages are long term and the money is received in a lump sum.  The payments typically consist of principal and interest.

When considering a construction loan from Falcon National Bank, here are few things you’ll need:

  • A loan application
  • Detailed plans
  • A construction budget or sworn construction statement
  • Any other documents our lenders request during the application process

Visit our website for more information! Let’s build your dream home together!

Falcon NMLS #: 402625

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