If you’ve looked into building a home from the ground up, you’ve probably seen a range of numbers when it comes to cost. Most online sources cover average costs nationwide, whereas South Florida has different costs (the cost of living in paradise is hurricane building codes). Thankfully, you’re not expected to have the cash on hand for the majority of the bill from the get-go. 

There are many ways to finance the life-changing investment that is a new home built specifically for your family. Of course, borrowing funds for new construction works a little differently than taking out a mortgage. After all, the house you are financing doesn’t physically exist yet. 

With this in mind, here are the most common approaches to financing the construction of a brand new home:

Construction Loans For Ground Up Construction in Miami

A construction loan covers expenses associated with the home’s construction, such as contractor fees, labor, permits, and building materials. You can also use a construction loan to purchase the land or property lot itself. 

Unlike a traditional mortgage, the funds for a construction loan aren’t provided in an initial lump-sum payment. Instead, the lender pays out the funds in stages. These pay-outs are known as draws, and they tend to happen during major milestones in the construction process, such as when foundation is laid, or when the framing of the house begins. An appraiser or inspector will periodically check in on the project and give the lender the green light to release each draw. 

Another difference is that with construction loans, you are usually only obligated to make interest payments while your house is being built. You are also only obligated to repay interest on the funds that have been drawn so far, as opposed to the entire principal. 

Different Types of Construction Loans in South Florida

There are two types of construction loans for new construction: construction-to-permanent loans, and construction-only loans.

With a construction-to-permanent loan, you pay closing costs one time, and the interest rate is locked in at closing. After construction is complete, the loan becomes the mortgage on your new house. Some lenders may allow you to lower your interest rate if the market has improved during construction. 

A construction-only loan, on the other hand, only funds the construction of your home. When it’s finished, you’ll have to apply for a separate, traditional mortgage. 

What are Interest Rates Like for Construction Loans?

Construction loans usually have variable interest rates, as opposed to the fixed rates of traditional mortgages. This means your monthly payment can increase or decrease based on changes in the prime interest rate. 

Compared to traditional mortgages, construction loans usually carry higher interest rates because they’re unsecured, meaning the lender has nothing to seize should you default on your payments. Due to the increased risk for the lender, interest rates are typically about 1 percentage point higher than traditional mortgage rates. 

Requirements for Construction Loans

Just like a traditional mortgage, you’ll have to make a down payment when you apply for a construction loan, typically at least 20 percent. 

Your lender will need to approve the builder of your home by reviewing their licensing and insurance. Additionally, the lender will need to approve your construction plan, which includes numerous pieces of documentation such as a signed contract, construction blueprints, a list of construction materials, a payment schedule, etc. 

Speaking of your builder, any delays or unforeseen costs in the project can lead to penalties and higher interest rates. So, you’ll want to make sure your builder is able to complete the project on time and on budget (and a great way to do that is having an architect as your owner’s representative throughout the construction phase of your build). At Debowsky Design Group, we stay right by your side after the design phase to make sure the contractor carries out the project as planned. 

If you’re ready to build the home of your dreams, you’ll have to design it first, and contacting an architect is a great first step. Give us a call and we’ll carefully guide you through each step of this journey, including financing. Yes, there’s a lot of steps involved, but you don’t have to do it alone.