Are you constructing your own home, garage, workshop, or any other structure? It is great because you can get exactly what you want. You get to decide about design, quality, budget, and more. However, one of the many decisions you’ll need to make is how to pay back the construction loan after the building is complete. Will you adopt a single-closing loan or two separate loans?
Construction loans are only for purchasing land and building structures. They usually last for no more than 12 months. You need a way to transition to a longer-term loan for lower payments that would come with a longer duration. You’ll need to pay off the construction loan once construction is finished. Many people do this by replacing it with a new loan that looks more like a standard 15 or 30-year mortgage.
Single-close construction loans
Single-close construction loans grant you the construction loan and the permanent loan at once. Your loan becomes a traditional mortgage when construction is completed. These loans are also known as construction-to-permanent loans.
Two-close construction loans
You need to get approved for two loans in a two-close construction loan. The loan will fund your project, and you’ll need to apply and get approved for a permanent loan separately after construction is completed.
Naturally, you’ll want to know which is better, and we’re here to help you with that. Call us to know more about construction mortgages in Canada.
Advantages of a One-Time Closing Loan
One application: It can feel like you have a never-ending research project when applying for a loan. You only have to go through the process once with a single-close loan.
One closing: Multiple closings mean greater costs. However, the cost difference might not be exciting, and you don’t necessarily come ahead with a single closing.
No payments: With few lenders, interest costs throughout the construction phase can be added to your permanent loan. This makes it easier for you to pay while you wait for your new home to be built. You’ll owe more and pay more interest. Delaying payments might be a sign that you’re almost at breaking point.
Security: You’re taking less risk when you have permanent financing in place before you ever borrow for construction. You’d have a hard time convincing a lender to approve your loan while you’re in-between jobs with a two-time closing. This might cause you to lose the home before you even get to live in it.
Locking rates: It will help you plan for your future when you finalize your permanent loan. You can calculate and budget for monthly payments well in advance because you’ll know what your interest rate will be. If you think rates will rise significantly during the construction phase, you can also lock in a rate. But if rates fall, some lenders allow you to adjust.
Advantages of Multiple Loans
Lower rates: Single-close loans probably go with slightly higher rates. You lower your risk and enjoy the convenience of one closing when you use a single loan, but those benefits come with a cost.
Flexibility: You’ll have to choose a prepackaged program when you use one loan. This means lenders may offer you choices of single-closing 15-year, 30-year. You get to go out into the marketplace and apply anywhere you want for any kind of loan when you keep your permanent loan separate.
If you’re planning to go for a construction mortgage in Canada or if you want to get advice from one of the best mortgage agents in Canada, you can contact us and we can help you.