People looking to start building on a commercial or residential lot often turn to construction loans in order to get the right terms for their project. Fortunately, there are essentially two types of loans to choose from. Unfortunately, it’s not always apparent which is the right choice. A new building needs to be funded for construction and then covered once it’s finished. You can either get one loan to pay for the initial building and the mortgage, or apply for a second loan to cover financing after construction. Understanding the differences between the two options will help you decide what’s best for your situation.

One-Time Close Loans

This option allows for a single loan application that will cover both stages of the building process. There will be a draw schedule that goes along with the first phase, the actual construction, and then the mortgage phase after the building is stabilized. The main benefit for these construction loans is, as the name suggests, you only have to close once and pay one closing cost. Additionally, you’ll be pre-approved for the permanent financing portion right out of the gate. From a paperwork standpoint alone, one-time close loans are far less of a headache.

Of course, these loans do come with a couple of cons. If you aren’t able to finish construction in time, you may have to take out a second loan and deal with extra closing costs. Additional fees can also be applied if the terms aren’t met. Another drawback is that the permanent financing rates can be higher when secured before the construction is complete. You might be able to find better rates for a permanent mortgage loan after the building is finished.

Two-Time Close Loans

Obviously enough, the second option is to obtain two separate loans, one for construction and one for the permanent financing. While closing two loans is always more expensive than closing one, it’s possible to make up that cost with a lower fixed rate on the second loan. Construction loans divided into two parts also offer more flexibility on the development end, as you won’t be working against any time constraints with the mortgage loan. This option might be better for a complicated project with a higher chance for setbacks.

Neither option is better or worse, just dependent on the project and how much time might be needed for completion. What’s important is that you be very clear about your building plan and make sure the lender is clear about their interest rates, then the right choice should present itself.