If you're looking to have a home custom-built from the ground up, then one of the first things you'll need to do is figure out how you're going to finance it. Essentially, there are two options when it comes to financing new home builders and construction project:

Your Options

There's the option of taking out one loan that encompasses both construction and a mortgage on the home. There's also the option of having the builder finance the construction and finding a separate lender to finance the mortgage. Both options come with their inherent advantages and disadvantages, but this article will cover the pros and cons of taking out separate construction loans and mortgages.

Construction Loan Interest is Deductible

One of the benefits of taking out separate construction loans and home loans is the fact that the interest paid on a construction loan is tax deductible, as long as the buyers end up living in the home as their primary residence when construction is completed. This is an attractive option to many buyers, as it can easily save them hundreds or even thousands of dollars when it comes time to file their taxes.

Buyers Can Shop Around for Rates

Another benefit to taking out separate loans for construction and a mortgage is the fact that it allows buyers to shop around and find the best interest rates and other terms for each loan. The same cannot be said of a combined loan, where buyers are stuck with whatever rates the construction company or mortgage lender has to offer as a joint financing option.

Buyers should be aware, however, that most construction loans are adjustable-rate, so interest rates can fluctuate quarterly or even monthly as construction progresses.

Requires Two Separate Closings

One potential drawback to taking out two separate loans for a new home is the fact that doing so also requires two separate closing processes. Anybody who has sat through a closing process on a home before knows just how long closing can take and how much paperwork is involved. Paying two separate closing costs can also be more expensive, so buyers should take this into account and calculate whether or not taking out two separate loans is worth it financially before making a decision.

As you can see, there are both pros and cons to taking out a separate construction loan and home mortgage. All prospective buyers should keep these in mind as they determine which financing option is best for them.

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