Pros and Cons of New Construction Loans

When it comes to investing in property, there are many options these days. Conventionally, people choose to invest in a home that is already built, especially if it’s their first one. On the other hand, building your own home can be a very exciting venture. There are many benefits to building a house from ground up, but that’s not to say it doesn’t come with some hurdles.

Luckily, there is financing available for those looking to start construction. A construction loan is generally a short-term loan that finances the cost of building or rehabilitating a home. So, whether your project involves ground up construction, or renovating an existing structure, a construction loan will help you finance what you need along the way.

If you’re considering building or renovating a home and are looking to learn more about construction loans, we’ve put together some pros and cons so you can have a better understanding of what the loan entails.

Pros of New Construction Loans

#1: Flexible Terms

Since construction loans are short-term and are dependent on the completion of the project, lenders will more than likely want you to provide a construction timeline as well as detailed plans and a realistic budget. This actually means that you’ll have a bit more flexibility when it comes to your loan terms compared to a traditional loan, since they’ll understand exactly how far along you are according to your timeline.

#2: They can Transition to a Permanent Loan

With new construction loans, you only have to pay interest on your loan while construction is in progress. Once construction is complete, the loan can be transitioned to a mortgage-like loan. And since you only pay interest during construction, you’ll have a lower monthly obligation which allows you save more money through the process. This can be particularly helpful for borrowers who may not have the ability to raise sufficient funds for loan repayment within the short-time frame of the loan.

#3: Guidelines Keep You on Track

Because lenders depend on the completion of the project for the borrower to pay the loan back, they can be stricter when it comes to you providing a construction plan. This involves getting specifics from your contractors about dates, materials, workers, methods, etc. for the project. However, having strict guidelines can help you get the job done on schedule and within your budget.

Cons of New Construction Loans

#1: Higher Interest Rates and Risk

Construction loans typically have higher interest rates because unlike traditional loans, they are not backed by collateral since the property has not been built yet. They are also viewed as being riskier because the loan must be paid in full at the end of the term. You as the borrower best be sure you will have the funds to pay off the loan, and the lender has to trust that you will as well.

#2: Harder to Qualify

Since construction loans are more flexible compared to traditional loans, lenders aren’t handing them out left and right. Generally, borrowers will need to have good creditworthiness and enough money set aside for the down payment and reserves.

#3: Should You Get a Construction Loan?

Construction projects can be costly, but having the funding from a construction loan is the perfect solution to get you the money you need for materials, labor and other expenses. If you’re considering investing in property for the purpose of building a home, or making a major renovation, applying for a construction loan can be a good option. With this in mind, it’s a good idea to weigh these pros and cons in relation to your needs, and speak with and experienced lender to go over your options.

New Construction Loans from RCN Capital

Here at RCN Capital, we offer a 12-24 month term program with rates starting at 7.99%.

RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners throughout the country. Whether you are looking to fix & flip properties or hold properties for rental income, RCN has flexible options that are suited to your needs. If you are an investor looking to finance a new construction, RCN Capital has competitive loan options available. Connect with us today to discuss your next new construction loan deal.