Pros And Cons Of A Construction Loan

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Loans are a favorite topic of debate for many people. Here in the United States, loans of different kinds are availed by people as young as university age, start taking out loans to finance their education. Once they have a job, they often take out a car loan then followed by house loan. These various types of loans are beneficial and disadvantageous at the same time. At the moment, it can indeed be, but it can cause a lot of problem and trouble in the long run especially if the borrower is not able to properly manage his time finances. Loans are often the downfall of many citizens, even successful ones. And sometimes, it’s not because they cannot pay, but it is because of the fast inflation of interest rates that most of the time, payments are all going to interest only.

One particular type of loan that is very popular is the construction loan. This type of loan is often taken for the benefit of either constructing a new house or rehabilitating an existing one. Construction loan primary residence came popular since it helps many households who need urgent renovations. It is also popular among those families who prefer to build a new home rather than purchase it. What you need to understand though before taking out one is that as much as it is advantageous in many ways, there are also some disadvantages. Let us present you both the good and bad side of construction loans.

Pros

It Has Flexible Terms

As compared to traditional loans, construction loans offer better flexibility on its terms and guidelines. It is very flexible to the extent that you can even work your loan terms based on your project needs. However, the process is not that simple; you need to show the bank proof of your plans for the project.

You Pay Interest Only During Construction

One thing that can make you feel at peace is that construction loans don’t ask any repayments while the building is on-going. You only get to pay the interest while the construction is in progress. This way, you do not have to stress yourself on expenses, and it also gives you more time to earn.

Strict Scrutiny During Construction

One of the good things you may not appreciate immediately is the fact that the loan amount is not released one time. It is published in installment basis based on the progress of the project. It helps keep the project stay within budget and schedule.

Cons

It is Difficult to Qualify

The term for construction loans are more flexible than any other loan; thus making the standard qualification for getting approved is high. A credit score of about 680 at least is required plus a down payment of at least 20 percent.

It Has Higher Interest Rate

Construction loans often have higher interest rates. It usually has a variable interest rate based on what the bank thinks is best for its customers. Most of the time, the interest rate corresponds to a particular prime rate, so you have to add them to get your total interest rate.