Construction Loans – How They Work
Construction loans are generally taken by people who invest in projects under construction or who have to construct their house or for those persons who want to renovate their house. The repayment of this loan starts when the activity toward construction begins. You can get construction loans for residential purpose as well as commercial purpose.
Commercial construction loans: These loans can be of many types like bridge loan, construction interim loan, real estate purchase loan, take out loan, mini perm loan, development loan, joint venture loan.
Residential construction loans: Residential construction loans can be of two types- permanent mortgage construction loan or only construction loans.
Working of construction loan: Commercial construction loan: these are the loans taken by businessmen who are involved in real estate or any type of construction works. These people take loans from various financial institutions for the completion of their project. They make the budget of the project on the basis of the duration of project completions and then apply for a loan. The lender looks upon their history of projects and their repayment history of loan they took to complete those projects. After the completion of the project they charge interest on the loan amount according to the value of project, the value of property and take then collect the loan amount. They don’t give much time for the repayment of a loan. If the lender fails to repay the loan amount then the financial institution has right to foreclose the property of the lender and then recover the loan amount after selling the property in an auction.
Residential construction loan: these are the loans taken by people for the construction of their house or for the renovation of their house. A person has to go to the financial institution for applying construction loan for their house. Then you have to submit your documents about your credit history and property papers so that the lenders can analyze and get convinced that you are a trustworthy person and giving you a loan will not be a risky thing. A fixed interest rate is charged for this and the repayment can start once your construction is over. You are liable for paying the interest amount as soon as you took a loan for construction. The rate of interest on this loan is floating. The borrower can apply for tax redemption on the interest amount charged on him.
The construction loan is not an easy thing because there are many defaulters in these types of loan. Usually people take loan for the construction and later they fail to pay as the construction charges are very high and due to some financial problems they fail to pay loans for the construction. Construction loans are provided to businessmen or those people who manage to convince the lender that they can pay their loan even is some financial crisis come.
Processing fees: it is an amount charged by the lender which you have to pay initially for the processing of the loan amount. This fee is not going to deduct from your loan amount, hence it has nothing to do with the loan amount and the interest amount. It is a basic fee charged for various formalities done in the procedure of the construction loan.
Duration of construction loan: the term of your loan depends on you that how much time you will take to pay off your loan. It is about 1 – 20 years. The rate of interest depends on the duration of your loan. The lengthier the loan the higher will be the interest rate charged on the loan amount and if the loan duration is for shorter period less rate of interest will be charged on the loan amount.
Taking a construction loan is not an issue at all provided you have evaluated your requirements against your financial capability well before applying for the loans.
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