You understand the distinctions between construction loans and mortgages, but do you find it difficult to explain them to investors or others in the industry? We are creating a five-point cheat sheet to help you easily explain the main differences between the two loan products at Fund Control.

We have not only made it easy to communicate with everyone involved in a deal via our fund control software, but we are also creating a five-point cheat sheet to help you easily explain the main differences between the two loan products.

The Terms Are Not the Same

Home building loans aren’t supposed to be repaid over time. The majority of them endure around a year. A mortgage, on the other hand, can last up to 30 years, but it is more common for them to last only five. One of the primary distinctions between a mortgage and a construction loan is the amount of time a person has to repay the debt.

Early Repayment Penalties Are Generally Not Included in Construction Loans

When a mortgage is paid in full early, it is common for a mortgage lender to impose a pre-payment penalty. The amount of the penalty varies per lender, and some do not have them. The goal is to assist the mortgage business in making money. Keep in mind that interest makes up the entirety of their loan revenue.

Construction loans, on the other hand, rarely include early payment penalties. While it varies per lender, in general, a construction loan can be paid off as soon as the contractor is able to pay it back.

Interest Rates on Construction Loans Vary

Interest is only imposed on the portion of a construction loan that was actually utilized during construction. What exactly does this imply? It implies that if a construction lender makes a particular amount of money accessible but the borrower only wants a fraction of it, they just have to pay interest on that percentage.

This is not the case with mortgages, which require borrowers to pay interest on the whole loan amount.

Construction loans provide funds up advance

Simply defined, a construction loan can (and often does) offer upfront financing for a contractor to purchase property on which to build. On the other hand, getting a mortgage authorized for a land acquisition is quite unusual.

They are frequently serviced by various companies

Not all loans are made equal. A firm set up to provide assets to a contractor looking to build a forty-unit condo isn’t exactly the best organization to assist a homeowner looking to purchase one of those units.

We strive to make even the most complicated circumstances simple for our clients at Fund Control. Check out our innovative investment management software to see how it may benefit you.