When you’re building your own home, you have a number of financing options available to you. One of these options is construction permanent financing. There are a number of benefits that come with construction perm financing that can work in your favor and help simplify the process of building and financing your new home. Learn how construction permanent financing works and how it can benefit you below.
Construction Permanent Financing
How does it work?
The bank extends a line of credit to the builder known as a construction permanent loan. The loan is structured into 6 draws that are contingent on the home’s construction reaching 6 different phases of completion. For example, once the home is 50% complete, the builder will call for a draw on the loan. A bank inspector visits the property to verify that it is 50% complete and will then issue the funds for the next draw on the loan.
Once the home is complete, the bank retains 10% of the loan until the county issues a use and occupancy permit or equivalent, and the builder provides the bank with any remaining documents. The bank will then issue the last draw to the builder, and the loan is converted from a construction loan to a permanent loan. This can be done using a number of financing products.
What are the benefits for the homeowner?
Construction permanent financing offers a number of benefits to the homeowner.
- Closing Costs. With construction perm financing, the homeowner closes on the land before the home is built, as opposed to once the home is built. This means that the transfer tax (which is assessed at closing) is assessed on the value of the lot, instead of the lot and the home. This means the homeowner saves a significant amount on the transfer tax. Not to mention you only have to close once on the property.
- Interest on the Draw. During construction, you’ll only pay interest on the current draw, as opposed to the loan as a whole. This can also provide you with a potential tax benefit. (Consult your tax advisor. You have your choice of fixed or variable rate interest during construction as well.
- Lower Sales Price. When you use a construction permanent loan, you’ll receive a consumer rate as opposed to a commercial rate. This saves the builder money, a savings which will be passed on to you in the final sales price of your home.
These are a few of the major benefits of construction permanent financing, but they’re not the only ones. To learn more about using construction permanent financing to build your new home in Maryland, contact Lifetime Series Homes today.
