Building a Home: How Are Home Construction Mortgages Different?

How are home construction mortgages different than traditional home mortgages?

This article is part 3 of our “Building a Home” series.

Watch Part 1:
How Much Cash Will I Need?

Watch Part 2:
How Much Can I Finance?

Many homebuyers are familiar with home mortgages but not the differences that exist with construction mortgages. So how are home construction mortgages different than traditional home mortgages? It’s important to understand how they work and how much you’ll need to pay each month during construction and after the house is complete. Rural 1^st construction loans are flexible, easy, and transparent. We offer a one-time closing construction loan, which means you don’t have to refinance your loan once your build is complete, saving you time and money by having only one set of closing costs. We set your repayment and final loan structure when you close the loan and start your project so you know what to expect.

Our construction loans offer fixed and adjustable-rate interest only payment options the first 12 months, allowing you to keep more money in your pocket during the build, a time when you might need extra funds. If your loan is adjustable rate, your monthly payment could change based upon fluctuations in rate, after your loan closes. At month 13, the total loan amount is amortized over the term of the loan with a set monthly payment including both principal and interest.

Once your home is completed, and if required, your property taxes and homeowner’s insurance will be collected and held in escrow. The taxes and insurance may fluctuate over time, but the principal and interest rate for the type of loan you choose are determined when you close your loan.

Construction loans are more complex than a traditional mortgage because the full loan amount is not distributed the day the loan closes, but rather during the construction project, which can be as long as 12 months. While a year sounds like plenty of time, it can go by very quickly. Building supply shortages, adverse weather, and labor constraints can all lead to delays. What this means is that since you’re only paying interest on the disbursed portion of your loan, the monthly payments won’t yet add up to the full payment amount, because interest only accrues on loan funds dispersed based on the day of their disbursement.

Say you have a long-term fixed rate mortgage and the first year is the construction period. During this time, your loan funds are only partially being dispersed, as your home is built. So the interest accrued is less than the amortization schedule expected. Your payments during the construction period may be lower to reflect the lower amount of accrued interest. As loan funds are dispersed to pay construction expenses, more interest will accrue and payments will increase. If your loan is not fully disbursed within the 12-month construction period, additional fees will apply. Your loan officer can provide more information.

One of the great benefits of Rural 1^st construction financing is the flexibility to restructure your loan after the first 12 months. Say, for example, you have a large principle pay down on your new home after selling your current home. Your loan can be re-amortized to lower your monthly payments, and if interest rates were to decrease, you can take advantage of that lower rate with a simple rate conversion*. Understanding how much you’ll pay each month on your mortgage is important. You can forecast some mortgage payments using our mortgage calculator.

There are many considerations when buying property and constructing a home in the country, and it pays to know a lender that specializes in rural financing. Along with a network of experienced loan officers who can help you buy and build the country home of your dreams, Rural 1^st has a range of solutions designed specifically for rural living.

Learn more about how much cash you’ll need to build a home. When you’re ready to get Closer to What Matters®, connect with a loan officer.

*Conversion has a one-time fee of $750. Terms and conditions may apply. The fee is subject to change without notice.