“There Can Be Quite A Difference Between Construction Financing And Permanent Loan Rates”

Construction financing to permanent loan rates are going to vary considerably due to a number of potential factors.

On the construction financing side, rates are going to depend on the source of funds or lender category you’re dealing with and the security position offered to the lender.

For instance, construction financing from a bank or institutional lender is going to be a prime plus instrument somewhere between 1% and 3% above the prime rate in most situations.

Private mortgage financing of a construction project will see rate range from 8% to 11% for most projects for first mortgage position. If a second mortgage position is provided as security to the private lender, then the rate is more likely to fall in the 10% to 14% range.

At the other end of the spectrum in the construction financing process is the permanent long term loan that will pay out the construction loan.

When the construction financing is being arranged through a bank or institutional lender, many times it is a requirement of financing that the long term take out mortgage, if one is required, also be provided by the bank.

The long term permanent loan rates in these cases are likely going to be at or close to the bank’s posted mortgage rates.

In situations where the builder, developer, or property owner intends to secure the construction financing from a different lender than the permanent loan source, there can be further variability in the interest rate on the permanent loan.

For instance, market conditions aside, permanent loan commitments offered at the beginning of a construction project may have higher rates than permanent loan offerings at or near the end of the project.

The reasoning here is that once a project is completed, not only is the construction risk taken away, but a well done and attractive looking end product that is well situated in its market is going to be a more attractive asset to finance that something planned out on paper that is yet to be constructed.

There are different strategies one can take to try and get the best rates for both the construction financing portion of a project and the long term take out loan. Each approach will need to be curtailed and adjusted to fit the requirements of the borrower and the project.

If you are looking to secure construction financing rates and/or permanent loan rates to capitalize the construction costs at the end of the project, then I suggest that you give me a call so we can discuss your requirements as well as different approaches you can take to optimize rates.

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