This loan can exist as a two-step component. In this case, the first step is the actual money that you are supposed to use to fund your building. This money can be withdrawn by the house owner on a need basis depending on the different stages of construction on is in at the time. In this step, interest only payments are made to the lender of the loan once the building is completed. The entire balance becomes payable.
In the second step, the recipient is supposed to take another loan to settle the loan. This is done to ensure that the home owner can get the benefit of having to repay relatively less during the period of the building. This encourages them to pay up faster.
Another loan plan involved in construction loans is one that is called the no-interest loan. In this kind of loan, there are no two steps. The home owner simply borrows a loan from the bank and uses the loan to cater for building costs. After the building is all finished, the interest is calculated and they start making payments at that point.
The second type of plan is the best to choose. One advantage of this loan plan is that you only have to repay one closing fee. This is a fee that the bank charges you once you have completed paying up a loan. This covers for all the cost of processing your payments. If you take the two step plan, you will have to pay the closing fee for the construction loan and another closing fee for the permanent loan.
An added advantage of using the no-interest building loan is that the interest you pay will be lower. This is because there is no interest imposed during the building period. As opposed to the two step loan where the interest still rises even during the period of construction. This means that if you take a long building period, the interest that you will pay should be higher.
An advantage of taking either one of these loans is that you will have a very smooth building period. This is because there shall be a steady flow of funds in case you need to buy any building materials. The funds will be there. The builders payments shall be paid on time due to all this, the entire process will be faster and smoother for the builders.
Having this type of loan shows you that the financial institutions are willing to help you fund your building projects. With this in mind you should really consider this kind of funding when you are about to build or do a major renovation.