What is the Difference Between Lot Loans and Construction Loans

A lot loan can be thought of like a mortgage except just for the land where you can build. If you want to own a lot of land, but don’t know what you are going to build on it, then it might be good to consider buying it now. While you pay off the lot loan, you can talk with everyone and gather ideas for a home.

You’ve just moved to Texas, you absolutely love it there and want to build your dream home. You don’t want the cookie cutter house in another neighborhood. You have the perfect spot for your house, but something is missing. You need to figure out how to buy land in Texas.

Right, you need some way to pay for this. Can’t take a typical mortgage because you are building your dream home on your lot of land. You need to be getting a loan to build a house, not just any house though. It was to be your dream house. You may have heard “lot loans Texas” now that you live there and need to discover what exactly a “lot loan” is.

But what is a “lot loan” or any other loan for that matter? There are three kinds of loans that will help you build that dream house. But first, is it worth getting a loan?

Is a Loan Worth Getting

According to Forbes it is considered better to check out that loan “if you can borrow money for less than an amount you can reasonably expect to earn by investing the funds instead.” Pretty simple right? Considering 30 year mortgage rates are currently very low, chances are that loan might just save you money.

A Lot Loan For the Pristine Lot on the Corner

How Does a Lot Loan Differ From a Regular Loan?

It’s relatively simple. A lot loan is generally shorter in duration, ranging from 5-10 years, rather than the typical 30 for a mortgage. It can also have a higher interest rate, but that’s because if someone were to default on their loan, with a mortgage the bank gets a house, but with a lot loan the bank only gets a piece of land. While the land might be worth millions in your eyes, a bank might not view it as the same. In some situations you might be able to turn that lot loan into a construction loan.

A Construction Loan For Building Your Dream Home

In some situations you may be able to turn that lot loan into a construction loan once you establish what your dream home will look like. A construction loan is as it sounds, it will finance the construction of your dream home through monthly payments. Typically construction loans are shorter in duration with a higher interest rate. They also work a bit differently than how you would imagine a loan.

With a construction loan the bank will send out money to the construction firm as the construction progresses. Typically these are much shorter in duration and sometimes will only be for the length of the build time. However if you are looking for a loan that covers the construction and mortgage of a loan, there is one more type of loan that should fit your needs.

Construction-to-Permanent Loan to Lock in an Interest Rate For Future Payments

The Construction to Permanent (CTP) loan will lock in an interest rate for you to pay over the next few years, even after your house is finished being built. This type of loan can usually save you thousands of dollars if done properly. There are two options to save money, asking the bank to lock in interest rates and initially saving money on closing costs.

For starters, you should ask the bank if you can lock in interest rates after the builders break ground. This can save you money if the federal reserve or the bank decide to raise rates later on. Rates are currently at such an extreme low it would be incredibly beneficial to ask the bank if you can lock in a certain rate. It could save you thousands of dollars just with a simple question.

Secondly, you are saving money by having only one closing cost, which saves you thousands of dollars. Instead of closing costs on a mortgage and construction loan you will only have one closing cost on the CTP loan. Typically closing costs range from 2-5% of the purchase price. This saves you that second round of closing costs on the loan if you go for the CTP loan right from the beginning.

Which Loan is Right For Me?

This depends on just a couple simple questions. Did you find the perfect lot to build your dream home on? If yes, start with the lot loan. Next, will you be building your house in the next few years? If yes, next you will need a construction or CTP loan. Finally, will you be approved for a CTP loan or not? If yes, then get the CTP loan as it can save you thousands in the long run.