In comparing home loan versus construction loan it is important to understand that these loans serve entirely different purposes. A construction loan is a loan used during construction of a home or other building. Once construction is complete it has fulfilled its purpose and expires. At that point the home builder needs another type of loan to finance the amount of the construction loan. A home loan is a mortgage loan on an existing house. You will probably need a home loan after construction is complete, but it will not do the same job as a construction loan. You might also be interested in the following article: Requirements for New Construction Home Loans.
Home Loan versus Construction Loan Comparison: Construction Loans
Construction loans provide funds to build a home. Money is placed in an account, which the contractor draws off of as needed to buy materials and pay subcontractors and workers. During the course of a construction loan no payments are required to pay down the principle but interest only payments are often required to pay the interest on the money used. After construction is complete, any unused money is returned to the bank, and home owners never pay interest on that money. The homeowner must pay off the construction loan at the time of completion, either by obtaining a home loan, a personal loan, or paying the balance from his own funds. The most common procedure is to roll over the balance of the construction loan into a home loan by the same institution.
Home Loan versus Construction Loan Comparison: Home Loans
Home loans are designed to help home buyers repay borrowed money over time. Home loans are mortgage loans which amortize over the course of five, fifteen or thirty years. Thirty year mortgages are most common, but a fifteen year loan is a great money saving idea. The concepts involved in home loans are somewhat complex but a homebuyer should research to understand them completely before entering into a mortgage.
The basic principle of amortization is based on dividing the principle of the loan plus interest into equal payments, over a specified period of time. In the beginning of the loan most of the payment goes to interest, and very little is applied to paying down the principle. Therefore extra payments or adding a little extra to the payment helps pay down the loan a lot faster. Extra payments are applied directly to the principle, and can shorten the course of your loan considerably. Likewise a shorter term loan saves on interest as well, and extra payments are even more effective.
Home Loan versus Construction Loan Comparison: Combining a Construction Loan and a Home Loan
Since you will probably need both a construction loan, and a home loan, some banks combine the two loans in one loan process. This is highly beneficial because the home loan is negotiated and waiting to take effect once your home is built. You have the opportunity to lock in your loan mortgage rate, and agree on other terms at the same time you obtain the construction loan. This is very advantageous in the current economy because interest rates could go up during the course of construction.
Home buyers who purchase existing homes only need a home loan, but people who are involved in constructing their own homes, will require both a construction loan and a home loan later when the home is built. The differences in a home loan versus a construction loan are great, and include the time period one year vs. fifteen or thirty years, repayment of interest only vs. the aspect of amortization, and the fact that the purpose of a construction loan is to use borrowed money to pay for construction, while a home loan is designed to gradually repay the borrowed money in affordable increments.
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