What is a final loan?
A final loan is a specific type of long-term loan that an individual takes out to pay off a short-term loan. ready to build or any other bridge financing structure. These short-term loans are used by builders as seed funding to start construction of homes or other real estate.
Key points to remember
- Term loans are long-term loans used to repay a short-term construction loan or other form of bridge financing.
- Short-term loans, which are often taken out by individuals looking to build their own custom homes, tend to carry high interest rates.
- Once construction products are finished and builders refinance their short-term loans with end-of-life loans, interest rates usually drop quickly.
- Construction loans and closing loans are often bundled together under a single source of credit, which can simplify the credit application process.
How a final loan works
Although final loans may have interest-only characteristics that delay the repayment of principal, at some point they begin to amortize. This differs from construction loans or other forms of bridge financing, which are typically interest-only vehicles that require full repayment of principal and accrued interest, only when funds are disbursed from completion. to lend.
A final loan can be part of a combination of construction loan or final loan, which allows a borrower to deal with only one lender. This can simplify the paperwork as a borrower only needs to file one credit application.
In addition, the borrower usually only has to pay one set of loan settlement fees. But there are also downsides to dealing with just one lender. The biggest downside to this form of one-stop-shop is that borrowers cannot search for the best deal after interim construction finance is complete. While this package may have favorable terms for one of the loans, it rarely features low rates for both.
Lenders consider construction loans to be riskier than traditional mortgages because borrowers are more likely to default, due to high interest rates.
How borrowers use end-of-life loans
Year-end loans help construction loan borrowers pay off their entire initial balance after the project is completed. This is a welcome relief as the construction loan often carries interest rate.
Construction loans also tend to have their own thorny clauses. For example, they can require the borrower to repay the entire balance before the completion date of a given project, or they can require the borrower to designate a certain percentage of their payments for interest.
Construction loans are often taken out by builders or home buyers looking to build their own custom home. Once construction is complete, the borrower can then refinance the loan. Borrowers are generally attracted to this financing model because the refinanced loan relieves them of the consistently high interest rates associated with construction loans. By using an end loan to pay off the construction loan, the borrower saves money, based on the interest rate difference.