Construction-to-permanent loans, often called “single-close” or “CP” loans, are a type of financing that combines the construction loan and the permanent mortgage into one loan. This type of loan simplifies the borrowing process by rolling both phases into a single transaction. Here’s how they generally work:

Key Features of Construction-to-permanent loans.

1. Single Application and Closing: You apply for and close on the loan before construction begins. This means you only go through the application, approval, and closing process once, which can save time and reduce paperwork.
2. Two Phases: The loan has two phases:
   • Construction Phase: The loan funds the building or renovation project. During this phase, you usually make interest-only payments based on the drawn funds.
   • Permanent Phase: Once construction is complete, the loan converts to a permanent mortgage. This phase involves regular principal and interest payments on a long-term basis.
3. Draw Schedule: Funds are disbursed in stages based on construction progress, similar to standard construction loans. The lender releases money as milestones are completed, and you only pay interest on the funds drawn.
4. Fixed or Adjustable Rates: The interest rate on the loan can be fixed or adjustable. Fixed rates provide stability in payments, while adjustable rates might start lower but can change over time.
5. Long-Term Financing: After construction is complete, the loan transitions into a permanent mortgage with a longer repayment term (typically 15 to 30 years).

Advantages

• Simplicity: With a single loan and closing, you avoid the need for a separate construction loan and mortgage, which can streamline the process.
• Potential Cost Savings: You may save on closing costs because you only pay them once instead of twice (once for the construction loan and again for the permanent mortgage).
• Less Risk: There’s less risk of complications or delays in obtaining permanent financing since it’s all handled upfront.

Disadvantages

• Higher Initial Rates: The initial interest rates on construction-to-permanent loans might be higher than traditional mortgages, although this can vary based on the lender and market conditions.
• Less Flexibility: If construction costs exceed estimates or the project is delayed, it might impact your financing terms.

Eligibility and Requirements

• Detailed Plans and Budget: You’ll need to provide comprehensive plans, a construction budget, and a timeline.
• Builder Qualification: The lender usually requires you to work with a qualified builder or contractor.
• Good Credit: Strong credit history and financial stability are generally required.

In summary, construction-to-permanent loans offer a convenient solution for financing new construction or major renovations by combining the construction and permanent mortgage phases into one process, making it easier to manage and potentially reducing overall costs.