If you’re like most people with a construction project (either in mind or already underway), there’s a good chance you need to secure a loan in order to get it all done. But just when you think you’ve gotten it all figured out, you notice that your loan options are anything but straightforward. In fact, most of them are downright confusing!
What’s makes the average construction loan so complicated? Well to start, a single construction loan is often not singular at all, but rather multiple loans (with different purposes) all tangled up. This is because the first portion of a construction loan typically only is used to cover the cost of the project itself (construction tools and equipment, labor, etc.), but other costs (like refinancing) are put into a separate loan later on that acts more like a conventional mortgage. Because the refinancing terms often fluctuate upon the project being completed, interest rates can fluctuate wildly.
The risk here is that borrowers often end up paying multiple closing costs and fees on these different loans. Likewise, the terms may be stricter for construction projects that don’t go exactly according to plan, and borrowers may have to take out additional loans as a result (or even face penalties). And let’s face it, most construction projects definitely come with unforeseen circumstances and the occasional surprise! In many cases, it means developers having to charge higher costs to new tenants upon the project’s completion, and they may not be able to refinance with the initial lender due to the intial terms being “broken”.
So, what’s the alternative?
Though you’d be hard-pressed to find a lot of information out there on short to permanent financing options (many lenders will push hard on traditional loan options because it’s how they make the most revenue), the truth is that this is the ideal form of construction project financing for many.
What is a Short to Permanent Loan?
Like other construction loans, a short to permanent loan is essentially two loans. However, they are put neatly into a single package that allows the terms to be more clear (or at least way more clear than the average construction financing plan). The first loan or “short” loan is used to pay for the construction, while the second or “permanent” loan is used as the mortgage for refinancing. The loan package all comes from the same lender, allowing for there to be less confusion.
In a nutshell, short to permanent or simply, “short to perm” loans have refinancing already built in, so there are no questions later on. This is crucial, as many other types of construction lenders change the refinancing terms during the project or they will not approach refinancing until the project is already been complete.
Benefits of Short to Permanent Loans
One of the biggest benefits with this kind of loan is that the risk is far less great when refinancing is already built into the loan package. That said, here are the key benefits that come with short to permanent loans:
- Refinancing rates already set, so they will not risk going up should other circumstances change
- Flexible terms that accommodate for construction projects that take longer than planned or go in a slightly different direction than initially planned
- Usually a single closing cost for the loan package as a whole (rather than having them spread out through various loans)
- Often lower fees (as a result of the single closing cost and neat loan package)
- Protects you from financial ruin should the project not go according to plan, as refinancing terms are already set
For all of these reasons, we anticipate that an increasing amount of developers and construction companies will be turning to this lending option in the future. Interested in learning more about your short to permanent loan or other construction financing options? Contact the lending experts at Barret Financial Group today!