If you’re looking to build a new home from the ground up, you’ll need financing to cover the costs Construction loans are a common option, but you may need to transition to an end loan once the home is built What exactly is an end loan and how does it differ from a construction loan? This guide examines the key differences and scenarios when each loan type makes sense.
What is a Construction Loan?
First, let’s review what construction loans are Construction loans provide financing specifically to build a new residential home The loan covers costs like
- Land purchase
- Building materials
- Labor
- Permits and fees
The repayment term on construction loans is fairly short, usually 12 months or less This matches the expected timeframe to finish building the home
Construction loans have variable interest rates, which fluctuate based on market conditions. They also tend to have higher rates than conventional mortgages, as they are riskier for lenders.
Unlike regular mortgages, the lender disburses construction loan funds in installments as certain milestones are met during the building process. An inspector verifies progress before each draw payment.
What is an End Loan?
An end loan refers to the permanent mortgage used to repay a construction loan once the new home is finished. It is a regular fixed-rate mortgage with a longer repayment term.
With a construction-only loan, you must obtain an end loan to pay off the construction loan balance when it matures, usually after 12 months. If you have a construction-to-permanent loan, it automatically converts to an end loan mortgage after the home is completed.
End loans allow borrowers to stretch out repayment over 15-30 years. This significantly lowers the monthly payment compared to the short construction loan timeline.
Key Differences Between End Loans and Construction Loans
There are several key ways end loans and construction loans differ:
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Purpose – Construction loans finance building a home; end loans provide permanent financing afterward.
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Loan timeline – Construction loans are short term (6-12 months); end loans are long-term (15-30 years).
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Interest rate – Construction loans have adjustable interest rates while end loans have fixed rates.
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Collateral – End loans are secured by the completed home; construction loans are considered riskier by lenders.
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Payments – Construction loans require interest-only payments while homes are built. End loans have principal and interest payments.
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Loan amounts – End loans are usually lower than construction loan amounts.
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Draw payments – Construction loans use staged draw payments; end loans pay a lump sum.
When to Use a Construction Loan
It’s quite clear when a construction loan is appropriate – when you plan to build a new home from scratch. Situations when a construction loan makes sense include:
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You want to build a fully customized dream home.
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You found an ideal vacant lot you want to build on.
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You want to demolish an existing home and build a new one.
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You’re an investor financing new home construction.
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You want to act as your own general contractor to build a home.
Construction loans allow complete flexibility and customization in home building that you don’t get when buying an existing property.
When to Use an End Loan
You will need to obtain an end loan under two scenarios:
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Your construction loan doesn’t convert to permanent financing. With a construction-only loan, an end loan repays the balance when it matures after 6-12 months.
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You built the home using personal financing then want a mortgage. Some builders use personal equity or cash to construct homes then get a mortgage after it’s done.
End loans make sense when the home is complete and you want long-term financing to pay off a short construction loan. The benefits of an end loan include:
- Lower interest rate than the construction loan
- Long repayment timeline of 15-30 years
- Allows you to recoup personal funds invested in construction
- Can provide larger loan amount than construction loan
This converts short-term construction financing to an affordable permanent mortgage.
How to Get an End Loan
If your construction loan doesn’t convert to permanent financing, you’ll need to apply for a standard mortgage, or end loan, before the construction loan matures. The process is similar to getting a regular mortgage:
Compare mortgage rates – Shop around among multiple lenders to find the best interest rates and loan terms for your situation.
Check credit and income requirements – Most lenders require a 620 credit score and stable income to qualify for an end loan.
Get prequalified – Prequalification will show what loan amounts and rates you can likely obtain.
Gather documentation – Have pay stubs, tax returns, and bank statements ready to verify income and assets.
Complete loan application – Apply for the mortgage and submit all required documentation to the lender.
Get home appraisal – The lender will send out an appraiser to evaluate the newly built home’s market value before approving the loan.
Close on the mortgage – Once approved, you’ll sign final paperwork and the end loan funds will pay off your construction loan balance.
Advantages of End Loans
End loans provide a few advantages compared to construction loans:
Lower interest rate – End loans have fixed interest rates, which are generally lower than construction loan rates.
Smaller payments – The longer 15-30 year repayment term greatly reduces the monthly payments.
Tax benefits – You can deduct mortgage interest on an end loan, which you can’t do with construction loans.
Builds equity – End loans build home equity with each mortgage payment over time.
No balloon payment – There’s no lump sum balloon payment due as there is at construction loan maturity.
Disadvantages of End Loans
However, there are also a few potential disadvantages:
Loan origination fees – You have to pay closing costs and loan fees to obtain the end loan.
Loan limits – End loan amounts may be lower than what you could borrow with a construction loan.
No flexibility – The set repayment schedule doesn’t offer the flexibility of a HELOC or line of credit.
Lower cash flow – Large monthly mortgage payments reduce your free cash flow compared to interest-only construction loans.
Longer debt term – It will take 15-30 years to pay off the mortgage debt.
Scenarios for End Loan vs Construction Loan
Let’s examine some hypothetical scenarios to see when getting an end loan instead of renewing a construction loan could make sense.
1. Building a Custom Home
James takes out a $400,000 construction loan to build his dream home. The 1-year construction loan has a variable rate of 6%. He plans to get a fixed-rate end loan after the home is finished.
In this case, an end loan lets James lock in a lower long-term fixed rate. The 30-year end loan rate is 5%, lowering his costs. The extended term also gives him a more affordable monthly payment than repaying the construction loan.
2. Investor Building Homes
Maria takes out $1 million in construction financing to build four new townhomes. She plans to sell the homes once they’re completed.
For Maria, getting end loans on the properties doesn’t make sense. Since she is flipping the homes, she’ll repay the construction loans with the proceeds from the townhome sales. There’s no need for long-term mortgages.
3. Financial Hardship
AJ ran into financial difficulties and defaulted on his construction loan mid-project. Now the lender may foreclose on the unfinished home.
In this case, AJ likely can’t qualify for an end loan until the default is resolved. End loans require good credit and loan qualification. His best bet is trying to modify the construction loan.
Key Takeaways – End Loan vs. Construction Loan
The major points to understand when comparing end loans and construction loans:
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End loans provide permanent financing to repay short-term construction loans.
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End loans have lower fixed rates and longer repayment terms than construction loans.
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You may need an end loan if your construction loan doesn’t convert to a mortgage.
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End loans make sense when you want to lock in low long-term fixed financing.
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Construction loans are ideal for building a fully custom home.
Carefully assess your situation to decide if it makes sense to take out an end loan. This can help transition short-term construction financing to an affordable permanent mortgage.
What Is an End Loan?
An end loan is a specific type of long-term loan an individual procures to pay off a short-term construction loan or other interim financing structure. Such short-term loans are used by builders as start-up financing to launch the construction of homes or other real estate properties.
- End loans are long-term loans used to pay off a short-term construction loan or another form of interim financing.
- The short-term loans, which are often procured by individuals looking to custom build their own houses, tend to carry high interest rates.
- After construction products are complete and builders refinance their short-term loans with end loans, the interest rates typically drop precipitously.
- Construction loans and end loans are often co-packaged by a single lending source, which can simplify the credit application process.
How an End Loan Works
Although end loans may have interest-only features that delay the repayment of principal, at some point, they begin to amortize. This differs from construction loans or other forms of interim financing, which are typically interest-only vehicles that require full repayment of principal and accrued interest, only upon disbursement of funds from the end loan.
An end loan might be part of a combination of construction or end loan, which allows a borrower to deal with just one lender. This can simplify paperwork because a borrower need only file a single credit application.
Furthermore, the borrower generally must pay only one set of loan settlement costs. But there are also disadvantages to dealing with a single lender. The biggest downside to this form of one-stop shopping is that borrowers cannot hunt for the best deal after the interim construction financing runs its course. Although this package deal may feature favorable terms for one of the loans, it seldom presents low rates for both.
Lenders consider construction loans to be riskier than traditional mortgages because borrowers are more likely to default—thanks to the high interest rates.
End loans vs Construction Loans
FAQ
What is an end loan?
What is the difference between a construction loan and a regular loan?
Is a construction loan an open ended loan?
What is the meaning of end use of loan?
What is the difference between a construction loan and a mortgage?
Beyond the cost and repayment timeline, construction loans and mortgages have a few main differences: The funds distribution: Unlike mortgages and personal loans that provide funds in a lump-sum payment, the lender pays out the money for a construction loan in stages as work on the new home progresses.
What is the difference between a construction loan and an end loan?
While construction loans are typically interest-only vehicles with full repayment upon disbursement, end loans may include interest-only features initially but eventually transition to amortization. End loans also offer the advantage of dealing with a single lender, simplifying paperwork and potentially reducing settlement costs.
What are construction loans?
Here’s an explanation for Construction loans are short-term loans that you can use to build a new home. Some construction loans can be converted to mortgages after your home is finished. Construction loans typically have tougher criteria than conventional mortgages for existing homes.