New Construction Loan Terms

[Derek Malveaux]

I was recently approved and received loan terms for a new construction SFR spec loan. I have experience with fix and flip but this is my first new construction project. The interest rate is 12.5%, which is understandable with no track record. The loan point is 4%, high but i'm new. What I was not expecting was a fixed monthly interest only payment on the full amount of the loan. This includes paying interest on funds that have not been drawn. Is this common for new construction loans?

[Jay Thomas]

I advise that new construction loans often have fixed monthly interest-only payments on the entire loan amount, even for undrawn funds, due to the increased risk. While your loan rates and points may seem high, this is common for newcomers in new construction. As you gain experience and successful projects, you can expect better loan terms. Key considerations include setting a realistic budget and timeline, hiring a reputable contractor, anticipating delays, and maintaining open communication with your lender and contractor. If the fixed interest-only payment concerns you, discuss alternative options with your lender or consider refinancing after project completion. Houston's robust housing market makes new construction a smart investment, but thorough planning is essential.