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Construction Loans and End Loans

Ask the Real Estate Lawyer: Real Estate Law Q&A

REM #LAW 734

By Ilyce R. Glink and Samuel J. Tamkin

Summary: A ThinkGlink reader currently has a construction loan and is planning on needing an end loan to finance the completed building. Ilyce and Sam explain how construction and end loans work and provide this reader with advice on how to minimize the amount of interest he will pay.

Q: I'm learning about construction to permanent loans. My most immediate question is why can’t I pay "draws" as they come up before paying interest?
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For instance, if the first draw the builder took was for $50,000, I would want to pay that in full. Is that possible?

My loan officer can't quite figure out why I would even want to. My reasoning is simple: I want my converted loan to be as low as possible, and to pay as little interest as possible.

A: A residential construction loan is used by a homeowner while he or she builds a home and a commercial construction loan is used by a real estate investor to build a commercial property. Either of these loans has the lender giving the borrower a bit of money at a time as the building is put up.

When the home is up and the homeowner moves into it or the commercial building is up and rented, an end lender – meaning a lender that wants to give the borrower a permanent loan – will finance the property as it would any home or commercial building, without dealing with construction issues.

During the construction process, the lender will give you money to continue with your construction. Each time you need money for the construction you request a “draw” on the loan.

Once a portion of the loan is paid to you, you have to start paying interest on the loan. You imply from your question that you have cash in hand to pay off your construction loan as you make each draw. If that is so, why do you even have a lender? If you don’t need or want to “borrow” the money, why didn’t you just pay cash for your construction costs?

Your loan officer is perplexed because on one day he lends you money and you want to pay it back that same day. To him it doesn’t make sense and we agree.

Either you want to borrow money and proceed with your construction or you have some or all of the money for the construction in hand. If you have the money and don’t want to pay interest on the loan, you could start the construction with your funds and draw down the loan as you need money. That process would minimize the amount of money you borrow and the length of time for the funds that you have borrowed.

If you have an end loan amount in mind, you should sit down with your construction loan officer and talk with him about what these thoughts. The loan officer may have the authority and ability to readjust the amounts that you draw from the loan with other funds that you have and you can work to get the building put up.

If you borrow too little, you can request that the end loan be a little higher. If you borrow too much, you can request that the end loan be lower and that you will pay off the construction lender with money you currently have.

Samuel J. Tamkin is a Chicago-based real estate attorney. Ilyce R. Glink’s latest book is 50 Simple Steps You Can Take To Sell Your Home Faster and For More Money In Any Market. If you have questions for them, write: Real Estate Matters Syndicate, PO Box 366, Glencoe, IL 60022 or contact them through Ilyce’s website




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