You know the differences between construction loans and mortgages but do you have a hard time summing it up for investors or others involved in the industry? At Fund Control we have not only made it easy to communicate with everyone involved in a deal via our fund control software, we are also creating a five-point cheat sheet that helps you easily explain the main differences between the two loan products.

1. The Terms Are Different

Home construction loans are not meant for the long-term. Most last for about a year. However, a mortgage can last up to 30 years, though they may last only for five years. The length of time a person has to pay off a loan is one of the main differences between a mortgage and a construction loan.

2. Construction Loans Do Not Generally Include Penalizes for Early Repayment

It is often the case that a mortgage lender will require a pre-payment penalty if the mortgage is paid in full early. The amount of penalty can vary by lender – and not all have them. The purpose is to help the mortgage company ensure they make money. Remember that the entirety of their income from loan is interest.

On the other hand, construction loans do not typically have fees for early payment. While it will vary from lender to lender, it is generally the case that a construction loan can be paid as early as the contractor can repay it.

3. Construction Loans Charge Interest Differently

With a construction loan, interest is only charged on the amount of the loan that was actually used during the construction. What does this mean? It means that if a construction lender makes a certain amount of money available, but the borrower only requests that a portion of it be released, then they only pay interest on that amount.

This is not the case with mortgages because borrowers on mortgages will pay interest on the entire amount of the loan.

4. Construction Loans Offer Upfront Funds

Simply put, a construction loan can (and usually does) provide upfront funds to buy land that a contractor wants to build on. On the other hand, it is extremely rare for a mortgage to be approved on a land purchase.

5. Different Companies Often Service Them

All lending is not created equal. A company that is set up to offer assets to a contractor who wants to build a forty-unit condo is not necessarily the right company to help a homeowner who wants to buy one of those condos.

At Fund Control we work hard to make even the most complex cases simple for our clients. Check out our unique fund control software to learn how it can be the right choice for you.