Is a construction-to-permanent mortgage right for me?

Q: What is better for me, a construction loan rolled into a permanent loan, or a construction loan and then a refinance?

A: The answer, of course, depends upon the terms available to you. There are advantages and disadvantages to both choices.

In a typical construction-to-permanent loan, a line of credit is set up by the mortgage lender who makes payments to the builder or general contractor as certain performance goals are met (foundation is put in, framing, electrical and so on). This usually takes the form of a short-term line of credit based on the Prime Rate; you usually will make monthly payments comprised of interest only. The final remaining balance at the end of the process becomes the basis for your permanent mortgage.

As far as benefits go, a typical construction-to-permanent package may come with just a single closing and single set of closing costs, so it can be economical.

However, given the construction period--up to a year --there is no easy way to know what the final interest rate will be on your mortgage, or whether it will be a good deal or not.

In terms of a construction loan by itself with no attached permanent mortgage, there are a couple factors to consider. To start with, you will usually have two closings, one for each loan, so there will be two sets of closing costs.

You will not be able to get a refinance in place until your Certificate of Occupancy is issued, and there is no way to know what market conditions will be when you enter into the open market at that time. Furthermore, there is no guarantee that market conditions won't change, making it difficult for you to obtain a mortgage at all.

On the upside, you do get the chance to shop the market and look for a better deal on the permanent mortgage, but again, there is no guarantee that you'll find a better deal than what may have been available from the construction loan lender.

For more information on the current state of the new-construction market, be sure to read “New rules for the new-construction market" in our recommended reading section.

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Keith Gumbinger
Keith Gumbinger
Mortgage Expert
Vice President,
About Keith: Mortgage market observer and analyst with 35 years experience... (more)
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