So what is a Construction Loan Calculator and how do you know what it calculates? First you need to understand what a construction loan is and how it works. Then you can start to use a construction loan calculator. Only then can you compare different construction loans to see which is best for you.
A construction loan is a special mortgage. Lets say you have a piece of land and would like to build a house. You don’t have the cash necessary to build the house so you need a mortgage. The trick is to get a mortgage you’ll have to pledge your house against the loan so if for some reason you can’t repay the loan the bank can take and sell your house. Since there is no house, the bank has nothing to use to secure the loan and protect itself. This is where a construction loan comes in. A bank will ask you to put together a building plan and budget. You will need to front a percentage of the money to get started. Then when you have completed the agreed upon first step of the building they’ll come and inspect. If you have indeed completed what is required they’ll give you the first payment. This process continues until all the steps are completed and the house is ready to be lived in. Until you have finished the whole house you’ll be paying monthly interest only payments to the bank based on the principle they’ve paid you so far. Once your house is complete then the loan will convert into a traditional mortgage.
A construction loan calculator is a piece of software or page on the internet where you can plug in some basic factors and it will calculate how much the construction loan will cost. So you will tell it how much you’ll need for each step and how long it’ll take you to complete. It’ll then give you a listing of the monthly interest payments as well as the amortized interest over the life of the traditional mortgage. Once you know the formulas a loan calculation isn’t all that difficult. It’s the repetition that’ll get you. Say you find an interest rate of 4%. You do the math to see what a 4% rate will look like for a payment on 30 years. Then you want to see what the payments looks like for 15 years and you have to do all the math over again. This is where a construction loan calculator really comes in handy.
To compare all your construction loan offers and see which is best for you, you’ll need to take the total amount of interest in dollars for each loan given to you from the construction loan calculator. You’ll then compare these amounts, again in dollars, for all the loans you are considering and find out which is the cheapest.
So a construction loan calculator can be a great tool to use to find the right loan for you when you are considering building a home.