When building a home, financing the construction can be a complex process. Two popular loan options are the one-time close construction loan and the two-time close construction loan. Understanding the differences between these options will help you choose the one that best fits your needs.
One-Time Close Construction Loan
A one-time close construction loan, also known as a construction-to-permanent loan, allows you to finance the construction of your home and its mortgage with just one application and closing. This loan is ideal for borrowers who want to simplify the process and save on closing costs, as you only pay closing fees once. Once the construction is complete, the loan automatically converts into a standard mortgage, eliminating the need for a second application or approval process.
Benefits of a One-Time Close Loan:
- Convenience: Since there’s only one closing, the process is streamlined. Once your home is built, you won’t have to worry about reapplying for a mortgage.
- Cost Savings: Closing costs can be substantial, so only paying them once is a significant benefit.
- Locked Interest Rates: With a one-time close loan, you can lock in your interest rate from the beginning, protecting you from potential rate increases during the construction period.
However, one-time close loans may have slightly higher rates and fewer lender options. If you make changes during the construction process, it could also complicate the loan.
Two-Time Close Construction Loan
A two-time close construction loan involves two separate loans: one for construction and another for the permanent mortgage. During the construction phase, you make interest-only payments. Once the home is completed, you secure a separate mortgage to pay off the construction loan.
Benefits of a Two-Time Close Loan:
- Flexibility: If you’re unsure about the final cost of your home or need more time to finalize design decisions, a two-time close loan gives you flexibility.
- Competitive Mortgage Rates: Since you secure the permanent mortgage after the construction is completed, you may have more options and better terms for your long-term loan.
- Adjustable Construction Phase: With two separate closings, you have the option to adjust or modify the construction loan before moving to the permanent mortgage, which can be beneficial if there are cost overruns or delays.
One downside is that you’ll need to go through the approval and closing process twice, leading to additional fees and possibly higher costs in the long run.
Which Option Is Best for You?
Your decision between a one-time close and a two-time close construction loan will depend on your financial situation and construction plans. If you want simplicity, cost savings, and the security of a locked interest rate, a one-time close may be best. If flexibility and the ability to adjust your loan are more important, a two-time close could be the better option.
