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In case of construction loans, the lender needs to get convinced regarding the importance behind the planned construction and also about the revenues that can be generated out of the construction. Depending on these details, a lender can provide the loan amount.
These loans are primarily short term or temporary loans with a repayment period ranging between six months to one year. Interest rate on these loans is variable and gets adjusted every quarterly or monthly. These loans are usually paid off by a long term mortgage loan on the constructed home. The funds obtained through this type of loan are used to fund different stages of construction. One important feature of this loan is that the lender is associated with the project throughout the period of construction; the lender ends up supervising the construction and conducting periodical reviews.
There are different types of loans for construction being offered by lenders. While some lenders offer just construction loans, there are also lenders providing a combination loan. In case of a combination loan, the loan for construction becomes a permanent, long term mortgage loan at the end of the construction period. The advantage of applying for a combination loan is that the borrower need not go around the market searching for a creditable lender. Other benefits include reduced closing costs and an easier application and loan approval process.
With the objective of wooing customers, lenders are now coming out with various innovative strategies. One such strategy is the rate-lock agreement. In case of loans used for construction, where the interest rates change periodically, the borrower can opt for a rate-lock. In this way, the interest rate gets locked for a specified period of time and becomes valid through the expected completion of the construction. There are also several other strategies that are being implemented by lenders. It is important that customers shop around for better offers before opting for a loan to construct a piece of real estate.
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