What is a Construction to Perm Loan?

by Tina Merritt

There is not one specific definition for this type of mortgage as banks offer many different variations of this loan.  Also, construction to perm loans can be done for new construction or remodeling.  The basics are:

A one step or two step loan process.  With the one step process, the initial construction loan is then converted into the longer-term mortgage.  With the two step process, one loan is provided for the construction and then another loan is provided upon the completion.

Depending on the loan type selected, interest rates can vary greatly.  Some people choose a floating rate, others choose to pay for a lengthy lock and guarantee a fixed rate.

The two step process usually incurs added expenses for the homeowner as they have two closings and thus, two sets of closing costs.  That being said, a benefit of the two step process can be that the homeowner can shop for the best possible terms just a few weeks before closing on the second loan.