Construction Loans in the Long Beach Island Real Estate Market

One potential roadblock to building a new home on Long Beach Island has to do with financing. Construction loans operate under different guidelines which can make obtaining LBI real estate construction financing more difficult. Therefore, it is important to understand your options as well as the risks and benefits of building a new home.

LBI Real Estate Construction Financing

There are a few common elements present in most construction loans. They are:

• The interest rate will be higher than a conventional loan
• Construction loans are typically interest only
• Depending on the lender, a construction loan may roll over into a conventional loan once the project is complete

Regardless of a credit score, income, or debt level in most cases the interest rate will be much higher on a construction loan than a conventional loan. This is due to the fact that construction loans are considered investment products with a higher level of risk. The good news is, the interest is charged only on the amount of money that has been used rather in the entire loan balance. In other words, if you are seeking $300,000 for a construction loan and that loan is broken into six $50,000 payments you only pay interest on the payments you have used today. Therefore, the bank will loan you an initial $50,000 payment which you will pay interest on. Once those funds have been exhausted and the next payment of $50,000 is issued, the interest charge will be on the hundred thousand dollars that has been used. This cycle will continue until the project is completed and the loan has been rolled over into a more traditional product. Most construction loans are interest only. Therefore, it is important to remember the payments you are making do not diminish the principal balance.

How Construction Loans Differ From Conventional Loans in the LBI Real Estate Market

Construction loans differ from a conventional loan in many ways. The terms and conditions of a construction loan will depend greatly on the individual applying for the loan and the institution offering the product but in general there are a few “standards” to go by.  For example:

• Construction loans on Long Beach Island NJ and elsewhere tend to be interest only loans with the balance due upon an issuance of a Certificate of Occupancy
• Construction loans typically carry a slightly higher interest rate and may be an adjustable rate mortgage
• Money is not given up front but rather in a series of “draws” for each stage of the construction project. It is common for the homeowner, the builder and the lender to establish this timeline prior to the loan being granted.
• Construction Loans on Long Beach Island New Jersey are not meant to be permanent. They are designed to fit a specific need and then a new mortgage be taken out on the property (which is typically a conventional loan)

It is important to understand the ins and outs of Construction Loans on Long Beach Island New Jersey and therefore it is best to speak with a lender who offers this kind of specific product.  Construction loans can be a very effective way to purchase a property on Long Beach Island and build a new home thus attaining positive equity almost immediately. Given their differences from a conventional loan, it is important to understand the terms and conditions as Construction Loans on Long Beach Island New Jersey are not for all buyers in all situations! There are other similar loan types (for example a homestyle loan which is a renovation loan) that may be better fit depending on the needs of the individual.

Alternative Financing Strategies on Long Beach Island

There are a number of alternative strategies for financing a home in the LBI real estate market. For example:

• Seller Financing
• Second Mortgage on the Primary Residence
• Interest Only Mortgage
• Private Mortgage

Seller financing is a rather straightforward process by which a seller, assuming they do not have a mortgage themselves, may allow transfer of the property to the buyer for only a down payment and a monthly payment for a short period of time. .

A second home on a primary residence is another effective way to obtain financing in the LBI real estate market. The primary home is paid in part of in full, it may be possible to draw on the equity in the home to use as payment for a home on Long Beach Island.

Interest only loans gained negative press during the financial downturns, however they do have an effective place in a second home market. I do not recommend using an interest only mortgage as the sole source of financing, however they can be very effective in a speculative real estate investment.

A private mortgage, which is very similar to seller financing, is an effective tool for new construction. By borrowing money from an individual with the intention of building a new home and subsequently refinancing the new home, the overall loan process and costs should be lower.

Home Style Renovation Loans in the LBI NJ Real Estate Market

A home style renovation loan is a special loan product offered by Van Dyk Home Loans and Glendenning Mortgage Corporation specially for Hurricane Sandy damaged homes. A few of the programs details are as follows:

• A Home Style Renovation Loan qualifies for complete tear down and rebuilding of a property and can be for a primary or secondary home
• Pilings are an acceptable foundation and the loan will apply to modular homes as well as traditionally built structures
• The loan is available for a purchase or refinance and the LTV (loan to value ratio) is based on the completed value of the home

This program offers some excellent opportunities for those looking to buy a storm damaged home in the LBI NJ real estate market or areas such as Beach Haven West. While there are federal loan programs for primary homes such as a 203k, these loans do not apply to the secondary homes or investment properties which make up the vast majority of homes on Long Beach Island. Since this program applies to secondary homes, it is of tremendous value to those looking to buy and rebuild on LBI!