Construction/renovation loans are a bit complicated, you really have to be dedicated to the process, and be ready to take this on as a second full time job.

A construction/renovation loan is typically used when you are building a home from scratch, or have a large renovation.

The initial “acquisition loan” to buy the house and then start the renovations is usually an “Interest Only” loan based on “Prime Rate”. So you may pay Prime Rate + 1%, for example, during the construction phase. Banks usually restrict your time period on the construction, for example they may give you 6 months to complete the work. After the construction is over, you get a “permanent loan”, with a market rate for a traditional loan (like a 30 Year Fixed Rate), that is locked-in at the time the work is complete.

There is some interest rate risk, since you won’t get your “permanent loan” with a final fixed rate, until the work is complete. This could be quite a risk. Obviously a benefit with a finished home not needing construction or renovations is that you can “lock-in” an interest rate right away.

Also, a construction/renovation loan is a complicated Read the rest of this entry »