If you’ve made the bold choice of building your office space rather than purchasing an existing commercial property, you’re highly likely to qualify for a construction loan. These tend to be short-term, high-interest loans that are used to cover the cost of construction or rehabilitation. These loans are based upon the estimated projected value of the property upon the completion of the project.
Types of Construction Loans
There are namely three different types of construction loans:
1. Construction to Permanent Loans:
This loan is suitable for borrowers with a definite construction plan and timeline in place. You may expect the financial institution—be it the bank or a private money lender—to pay the builder in regular installments based on the completion of the work. The overall cost may then be converted to mortgage upon closing, accounting for steadier payments.
2. Construction Only Loans:
Construction-only loans are to be paid in one full installment upon the completion of the building structure. It is best suited for borrowers with significant liquidity (i.e., cash flow).
3. Renovation Construction Loans
This loan type is readily used in situations where the purchaser has bought a fixer-upper. The estimated cost of renovation and the total cost of land purchase is all wrapped up in the mortgage.
Benefits of a Construction Loan
1. Added Scrutiny for Structure
The added scrutiny provides more structure to the project to ensure it stays on schedule and budget.
2. Flexible Terms
Although you need to provide the institution with plans for the project, construction loans tend to offer more flexibility when compared to traditional lending channels. You’ll find it easier to work around the guidelines of your loan and tweak them just a little bit to best meet the needs of your project.
3. Interest Only During Construction
The construction loan is rarely ever paid out in full until the new construction hits completion, which translates to the lender not asking you to start paying down payments either. Amid the ongoing construction, you’re only expected to pay the lower, interest-only payments of the loans, giving you more time to save.
Disadvantages of Construction Loans
Construction loans are hard to qualify for as they require relatively high qualifying standards in terms of credit and down payment. They also charge somewhat higher interest rates, which correspond to a percentage of the overall prime rate. Lastly, loans this short-termed are a risk, considering you need to be able to pay off the loan in full.
At Commercial Private Equity, we offer construction loans without the need for a good credit score, and our interest rates are as low as 10 percent! We’re a team of private hard money lenders who say yes to commercial loan financing. Schedule an appointment to discuss your new office plan today.