Home Loans Articles


Finance Your Dream Home Use a Construction Loan

Have you looked at houses available on the market and absolutely none of them match exactly what you want? Do you have a vision of your dream home but just can't find it anywhere? Well then why not get your dream home designed and built according to your specifications? Many Americans think their ideal home is out of their reach because they just cannot afford to get it constructed. With the help of a construction loan, it can be transformed into reality.



It's estimated that in today's housing market, one in four of us prefer to build rather than buy. According to the Census Bureau, only one in twenty people who build a home from scratch can afford to pay cash. The remaining take out a construction loan to finance the build.

There are two main types of construction loan available:

  • (1) A construction only loan, which becomes due once the house is built and must be paid off or replaced with a mortgage.
  • (2) An all in one loan in which the construction loan automatically reverts to a mortgage after the construction is completed.
Home construction loans do vary considerably from lender to lender because rather than financing existing bricks and mortar structures, they are lending money on something that doesn't yet exist. In general terms a construction loan is for the short term. They are only offered whilst the property is being constructed to finance your contractor's labour costs and materials. They normally have variable interest rates, which are higher than a standard mortgage interest rate, and you make monthly interest only payments during the build.

Unlike a standard loan like a car loan where all the money is given up front, the money for a construction loan is given as a series of draw downs that will have been agreed at the outset by the lender, you and the contractor. Interest is only charged on the amount that you have drawn down, so it makes sense to try and draw down small amounts at first and increasingly larger sums towards the end of construction to avoid paying high monthly repayments.

It is normally recommended that if you are looking for a construction loan, look for an all-in-one loan that automatically reverts to a mortgage after you have received your occupancy certificate. In this way, you can save costs as you will work with one lending company and only have one set of application and closing costs. As with all loans, make sure you research the market properly and find the construction loan that has the most favourable rates, with reasonable fees and costs attached to them. Constructing your dream home can be an expensive business, but by paying attention to the minor details you can save yourself thousands of dollars.