Whether you are looking to invest in a new real estate with the purpose of renting it, flipping it, retaining it for living, or wanting to spruce up your existing property, remodeling it can help you add to its value. Even if you don’t want to take advantage of the property’s appreciation by selling it, renovating it can help its maintenance become more cost-effective.
The most common way to achieve this is by financing the works through a construction loan. Here is everything you should know about financing loans for an upcoming project.
What are Construction Loans?
Construction loans are short-term financing solutions for building or remodeling properties.
As these works typically take less than one year to finish, the financing is tied to their duration and ends with their completion. While this can come in handy if you need a smaller amount of cash for your project, the short term also means higher interest rates.
Once your project is approved, you are provided with a payment schedule that follows the stages of the construction. During this, the lender will pay out the agreed-upon amount in small increments, and you will only be expected to make interest payments.
The works are monitored by inspectors, who need to approve each stage before you can get financing for the next one.
How to Get Financing?
Depending on your end goal, there are several types of loans for financing an upcoming project.
Traditional lenders, such as small banks and other financial institutions are typically less rigid in their underwriting. This means that as long as you have a good reference, they are much more likely to provide you with the funding you need. However, these lenders typically offer only larger amounts.
This can be great if you need a substantial amount of rebuilding a property – not so much if you need quick cash for a smaller project.
Hard Money Loans
While they are perfectly suitable for flipping purposes, hard money loans can be a cost-effective way to secure funding for a renovation even if you don’t intend to resell your property.
Whether you are a real estate investor or remodeling your existing property in Illinois, this option represents the easiest way to qualify for financing. In recent times, hard money lenders Illinois have become even more aware of people’s need for fast and efficient financing solutions. It’s an option worth looking into, especially if you want to ensure the return on your investment.
Private lenders are also a viable solution for securing the funds for your project. However, the interest rates may vary depending on your relationship with the lender. For example, borrowing from friends and family will typically leave you with more beneficial rates, while an unrelated investor may ask you to pay much higher interest rates.
The fourth option for financing property construction or repair projects is tapping into your home equity. You can borrow against different equity values, and your payment will depend on which options you choose. For example, with some, you will only have to pay interest, while others offer payback at a fixed monthly rate, but it can extend your mortgage.
Types of Construction Loans
Permanent construction: A construction-to-permanent loan can be a great solution if you are looking to remain the owner of the property after the work is finished. It automatically converts your loan into a permanent mortgage, which means you will have fewer fees to pay and more time to pay everything back.
Renovation: They come in many forms, depending on the amount you are able to spend on your project. Home renovation loans are typically secured through home equity or cash-out refinancing.
Construction-only: Provides financing in stages as the construction advances. You are responsible for paying it back upon project completion either right away or in monthly payments by securing a mortgage on your own.
Owner-builder financing: In case you are a licensed builder and plan to do the majority of the construction on your own, you may be eligible for owner-builder financing. In order to get approved, you must prove your ability to comply with building codes.
Loans for financing a real estate project are typically short-term and come with high-interest rates. For this reason, it’s a good idea to explore all your options before opting for any of them. Setting up a realistic budget and payment plan is fundamental for the success of your project.
Whether you will be able to repay the loan in due time is also dependent on the completion of the project. To avoid missing your payments, you should also make sure to hire licensed contractors that can get the job done in the provided timeline.