Find Out the Difference between Construction Loan and Owner-Builder Loan
It is true that purchasing or building a house is one of the greatest investment and a significant undertaking as well. So when people plan to build a house they often wonder how to conduct such a huge afford-ability. For building a house you typically need financing, which you can either get through mortgage refinance or by obtaining a loan. Different types of loans are available to you depending on your situation. To do so, the first question that would come to one’s mind is how much house can I afford Borrowers who hire construction companies usually obtain construction loans, while borrowers who build house on their own obtain owner-builder loans.
What is construction loan?
In the broadest sense of the term, construction loan is a loan where the proceeds are used to finance construction of some kind. You generally obtain this kind of loan when you hire a construction company to build your house. Either you or the construction company will obtain the loan. In most cases, you only need to pay the interest when the home is under construction. But once the project is completed, you will owe the balance of the loan. Home buyers pay off the balance amount of the loan by obtaining a mortgage on the home. Some lenders allow the borrowers to convert the construction loan to a mortgage after your project is complete.
What is owner-builder loan?
Owner-builder loan is a kind of loan which you get while building a house on your own. If approved, the lender will disburse the loan directly to you, and it’s up to you how you would like to use the loan. Typically, there will be one closing before you begin building and another closing when your project is complete.
Differences between the two:
Let us have a look at the differences between the construction loan and the owner-building loan.
• In case of a construction loan, funds directly go to the contractor, while in case of an owner-builder loan funds directly go to the borrower.
• Construction loan is obtained when you build a house by hiring a construction company. On the other hand, owner-builder loan is obtained when you build a house on your own.
• Approval for a construction loan often depends on the builder’s credit, whereas approval for an owner-builder loan is based on your credit.
In this context it is to be noted that the construction loans usually charge low interest rates as compared to the owner-builder loans. However, it must be remembered that working with a construction company is more expensive than building a house on your own.
