One-Time Close Construction Mortgages vs. Two-Close Loans
Did you know there is an FHA loan option that lets you build a house from the ground up? You can use this mortgage to build on land you own or on land you buy as part of the loan. If you have land equity built up in a property you already own you may even be able to use it as part of your down payment (circumstances permitting).
The FHA One-Time Close loan is the mortgage you want to build a home from the ground up instead of buying someone else’s dream home.
But you will want to address some issues comparing construction loan options. It’s true that some lenders still offer the riskier two-close construction loan with two applications, two closing dates, and two different interest rates for the two loans.
Why go with a single close construction loan? The most obvious answer is that getting through the approval process for a single mortgage is a lot better for most applicants.
But that aside, FHA One-Time Close construction loans feature a single interest rate, and that rate is typically offered for a 30-year, fixed-interest mortgage. It is not a variable or adjustable interest rate loan.
A single-close or One-Time Close loan process has the interest rate is set before construction and the permanent loan interest rate is also pre-determined for a surprise-free experience. Compare that to the experience a borrower may have during the more complicated two-close construction loan.
In those cases, a loan for the construction phase of the process may be offered strictly as an adjustable-rate loan. A fixed interest rate is offered for the permanent loan (the second one), which is the mortgage.
Application time is tricky for two-close loans. You get no guarantees that you definitely will qualify both times for the two loans. What could go wrong between the first and second applications?
Consider the borrower who has credit problems after the construction loan is approved. If they get the construction loan but not the permanent loan, there are obvious problems that happen as a result. The danger of being approved once, but not twice is enough to make some reconsider a two-close construction loan even if they are offered more competitive interest rates than a One-Time Close mortgage.
There are ways to manage the higher interest payments. one way is to divide your monthly payment in half and pay the same mortgage amount, but in two installments each month.
Paying this way means you will make an extra mortgage payment each year without having spent any extra money, and that can go a long way toward helping you save money over the full term of the mortgage.
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