A final loan pays off the remaining balance on a short-term construction loan, allowing for interest-only payments for a period of time after construction. It may have a better interest rate and be beneficial for commercial buildings, but may result in higher total payments and less attractive rates if interest rates change during construction.
A final loan is a type of loan used to pay off the remaining balance on any type of short-term construction loan. With many forms of construction loans, the principal payment is delayed until construction is complete. With a final loan, there is also the ability to continue making interest-only payments for a period of time after construction is complete, even though the loan will begin to amortize.
A very common model is to use a single lender to create a construction loan that is combined with a final loan. During the actual construction period, the borrower must make interest payments to the lender. Once construction is complete, the debtor is responsible for making payments that cover both interest and principal. At that point, the borrower elects to transfer the remaining balance of the construction loan into a new debt instrument, the final loan.
There are a couple of potential advantages to this type of arrangement. With a final loan, it is possible to extend the benefit of paying interest only for a period of time, possibly between one year and five years. This benefit can be especially important if the construction involved was for a commercial building, and the owner requires additional time to lease each unit within the building. Since interest payments are only required for the first few months of the years of operation, the owner has time to fill the space to his capacity and create an income stream that can be easily used to pay off the final loan according to the terms. .
Another benefit of a final loan is that the interest rate may be slightly better than the original construction loan rate. This is especially true if the property has appreciated in value as a result of construction, and the working relationship between the debtor and the lender has been satisfactory to both parties. Since the debtor would always be free to seek a new loan elsewhere to retire the construction loan, the lender may extend the more attractive interest rate as a means of retaining the debtor’s business.
Along with the benefits, there are also some potential drawbacks to a final loan. Since the loan balance begins to amortize immediately, choosing to make only interest payments for a period of time will mean that the total amount paid over the life of the loan will be higher. Also, it may seem like a mix of a construction mortgage and a finish mortgage at first, but if interest rates change during the construction period, the rate on the finish loan may not be as attractive as it once was in the past. For this reason, builders sometimes prefer to only commit to a construction loan and revisit the issue of a final mortgage loan with the lender when construction is near completion, while also taking the time to compare those rates with offers from other lenders.
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