Reasons Why You Shouldn’t Use a Construction Loan for Renovation?
People often suggest a construction loan to each other for renovations. People advise using a construction loan as they enable you to borrow considering the worth of your home after the home renovation. Earlier borrowers had no other option. However, today, there are options that helps the home buyer purchase and renovate the home under one loan.
Let us learn the top three reasons why people can prefer another renovation loan over construction loan.
If you are one of the home buyers who had locked the mortgage rate before the rates started rising, you got a good deal! However, when you want a construction loan, you need to refinance your home. As a result, you will have you lose the first mortgage rate and settle with the current mortgage rate (which often gets higher than your earlier mortgage rate).
For instance, suppose your current mortgage rate is 4.5%. After refinancing, the mortgage rate becomes 6%. The difference of 1.2% in the mortgage rate will become a sizeable amount at the end of your mortgage term.
- More Work in the Process
Construction loan involves considerably more work than the other renovation loans for you and your contractor. Whether you are constructing the loan from scratch or want to renovate the existing home, the requirements for the construction loan remains the same. The construction loan process involves additional efforts like organising the inspection visits, coordination with the lender, contractor, etc.
- Higher Costs
In addition to getting a higher interest, there are other costs involved in the process. During refinancing the construction, you need to pay the closing costs as per your new mortgage with the renovation budget. Confused? Let’s take an example.
If you have an $800k mortgage and $200k is your renovation budget, you need to pay the closing costs on an $800k loan versus just your renovation budget $200k alone.
The mortgage lender’s fees are also higher for a construction loan compared to other loans. As a result, it adds thousands of dollars at the end.
If you want the right guidance on the renovation loan and the process, you can approach Drew Mortgage Associates. As an experienced mortgage lenders in MA, our loan officers will help you at every step of the way in your mortgage process.