As with any financial tool, it is vital to know the pros and cons of Arizona Construction Loans before entering into a legally binding contract. This is the only smart way to choose the best loan for your project.
There are many different options when it comes to funding a construction project. You might explore using a home equity line of credit, a personal loan, or even an advance from credit cards. The other option is to secure a construction loan to cover the cost of the build. But before committing to the path of Arizona Construction Loans, it is critical to understand these Loans, their benefits, and their drawbacks. Only with all this information, can you make a well-informed choice about which loan will best meet your needs.
Arizona Construction Loans offer a massive benefit to borrowers during the construction phase because they are interest-only during that time. So, you have all that time to save before you are required to start paying down the principal on the loan. That reduced payment is beneficial if you are building your next home and need to cover your current living costs while still paying the construction note. But as soon as the construction is completed, be prepared for the monthly payments to increase substantially.
While you might not think of a traditional lender as flexible when it comes to loan terms that is not always true with a construction loan. In these cases, the lender is willing to work with you more on terms that will meet your needs because construction projects vary greatly. This could include a longer-term because of the region and weather of the build, or for a more intricate construction process. But this flexibility can be beneficial in finding the perfect loan to need the needs of your specific project.
The Downside of Arizona Construction Loans
Because a construction loan is funding a structure that does not exist yet, there is really nothing to be used as collateral. That fact drives lenders to impose more stringent criteria to those who are trying to qualify for the Loans. A credit score of 680 or more is a must, and the down payment is likely to exceed 20% of the loan value. And because of the increased risk associated with these Loans, you are looking at a higher interest rate. Rather than paying just prime, you might pay prime plus 2 – 3%.
More Risk but Also More Reward
Getting a loan for a construction project is certainly more challenging and expensive than securing a traditional mortgage. But when you are looking for a custom structure, you need to be willing to pay more for the perfect fit once the project is completed. The risk involved in a custom-built project is more significant than a traditional mortgage. More issues and costs could arise, which could result in a higher rate of borrowers who default on the loan. And the lender will face more challenges in finishing and selling the property if there is a default. But the big win for you is getting precisely what you want when the build is completed. So, do your homework, learn about the Loans, and select the one that works the best for you.
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About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.