What is a Construction Loan?
Designing and building your dream log cabin home can be an exciting experience. However, don’t let concerns over financing the construction derail you. There are options available if you don’t have cash upfront to cover building costs, like construction loans.
Many lenders offer construction loans to cover expenses during the log cabin building process. You can obtain these loans for single unit, detached properties that are primary residences or second homes. The terms are either fixed rate or adjustable. Then, the home owner, builder, and lender agree on a schedule of draws. As the work on the cabin progresses, those involved will make loan disbursements. During construction, the home owner makes interest only payments calculated based on the outstanding loan balance.
Once construction is complete, often these loans are converted into permanent mortgages. This is beneficial because there is no additional paperwork and with the one time closing you save on recording fees and closing costs. Some lenders allow you to lock in your interest rate before the conversion. At this point, scheduled monthly payments of principle and interest plus escrow, if applicable, will take effect.
A Few Things You Should Know About Construction Loans
- These loans are riskier for lenders so a lender may only offer 80% of project costs or less. If you already own the land, that can serve as equity.
- You may need cash to cover closing costs and the minimum down payment associated with the purchase of the lot if you don’t own the land already.
- The standard construction loan period of six months to a year is more than enough time to assemble a log cabin kit.
- Lenders require a “builder’s risk” insurance policy in addition to the normal homeowner’s policy. Builder’s risk insurance is coverage that protects a person’s insurable interest in materials, fixtures and/or equipment being used in the construction or renovation of a building or structure should those items sustain physical loss or damage from a covered cause.
- Plan ahead, and prepare for delays due to weather or material shortages.
- Changes or upgrades to the original plan which result in cost increases must be paid by the log cabin owner. The original loan amount can be reduced but not increased.
- Regional banks and credit unions can be the best sources for construction loans.
Once you get your loan and you are ready to get started, here are some tips for building.