Advantages and Disadvantages Of Construction Loans
If you are looking to secure funds to kick start your new real
estate project in Virginia,
then construction loans are a very good option. As the name
suggests, a construction loan is offered to real estate entrepreneurs who are
looking to develop their plot or rehab their fix and flip into a saleable
property.
Hard money construction loan financing is frequently used to
finance residential or commercial new construction projects. Typical
construction loan financing runs for six months to two years, requires
interest-only payments — that are often bundled into the loan itself — and are
funded in installments that follow a predetermined schedule of milestones.
Advantages
of Construction Loans
Some of the advantages of construction loans include:
Pay Interest Only: Most lenders will only require
you to pay the interest on the withdrawn amount. They will not ask you to pay
for the capital during the construction of the project. This can be extremely
useful for you. You can wait until the construction is over and then only need
to repay the loan amount. Until then, you only need to pay interest
Easy Approvals: It is far easier to get approved
for a construction loan from a private lender than to receive a loan from a
regular bank. As such, many real estate developers prefer to take a
construction loan than to approach a big financial institution.
Flexible Terms: Construction loans from a hard
money lender can be tailored quickly and effectively to your project’s
specifications. Whereas a bank has loan terms and guidelines that are often set
in stone, a hard money lender is a smaller shop and can work with you to make
sure that draw schedules and interest payments are set in a way that works best
for the both parties.
Disadvantages of Construction Loans
Some of the disadvantages of a construction loan include -
Higher Rates: Construction loans from a hard
money lender will be at a higher rate than those of a bank. This is for several
reasons: borrower profile, the existing condition of the property, riskier
investment and the availability of short-term funding. As long as you intend to
be in and out of the project within a year, construction loans from hard money
lenders tend to be a good option.
Short Term Loans: Construction loans are short-term
loans, typically given for a period of 6 months to 2 years. If your project
will take more than 2 years to complete, the amount that you will be paying on
interest will likely eat into your profits.
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