Construction To Perm Loans

What is a construction perm loan and what are the pros and cons?

1 Answer

A construction perm loan is a loan performed at the end of the construction phase that refinances the 'construction' loan to a common mortgage. Typically a construction loan is 'interest only' for the build period and most 'construction' lenders require that their 'construction' loan be paid off at home completion. The major drawback to this scenario is that the homeowner has to incur an additional set of closing costs when they are required refinance the construction loan. The good side is that you have the option and time to find a very good final mortgage.

As an alternative, there is what is known as a 'one-time-close' construction loan. This type of loan finances the construction period and has a loan program (30 year fixed, 3/1 ARM, etc...) already in place for when the loan 'converts'. The 'pro' is that you only have to pay closing costs once. The 'con' for these types is that you must lock in the final rate prior to closing. Many lenders offer a 'floatdown' (when rates drop durring the construction period, they will reduce your rate), but that often has a fee associated with it.