Video — How Construction Perm Loans Relate To Mortgages

Home mortgages are for completed homes, not construction projects. But construction projects may become completed homes, so there is a loan structure designed to cover construction, and convert to a mortgage at the appropriate point. These are commonly called "construction perm" loans.

Loan terms during construction are frequently based on variable rates, and provide scheduled cash disbursements — "draws" — to match the stages of construction.

When the home is legally complete-enough to qualify for a Certificate of Occupancy (CO), the loan is converted to a mortgage.

Construction perm loans have the advantage of a single application and closing, and dealing with a single lender.

If you are considering a construction perm loan, compare interest-rate trends to your construction schedule. Assume construction delays. Evaluate if a rate-lock on the mortgage stage looks advantageous.

In addition, weigh the short-term cost of the construction-perm arrangement against your mortgage rate and its long-term costs.