A single close construction loan, also known as a one time close construction loan, provides construction funding and is also the permanent financing. This is in contrast to a more traditional interim construction loan which would require “take out” permanent financing to pay it off. Single close construction loans have two basic structures. Our construction loan programs 1, 2 and 3 are 30 year loans in which the first 12 months are the construction period, during which time the loan is interest only on the amount disbursed. These loans begin to amortize after 12 months when the house is completed, and are 29 year amortization from that point, since 1 year of the 30 year loan was done as interest only. For example, a 5/1 ARM is fixed 5 years. The first year is interest only, and the next 4 more years are the beginning of the 29 year amortization period. This is the first type of single close construction loan where there is no note modification after construction is completed, and the construction rate is the same as the initial fixed period rate.
Our program #4 is an example of the note modification type single close construction loan. In this program, the borrower is locked in on a 5/1 ARM which begins after the construction phase. The construction phase of 12 to a maximum of 18 months is at a monthly adjustable rate. Historically, these note modification type construction loans had a prime based initial construction phase with the rate being some margin above or below prime. In our case, the construction phase is 4.5% above the 1 month LIBOR. Like all bank construction loans, it is interest only on the amount disbursed during the construction period. After the construction is done, the 5/1 ARM program begins. Here you would have 5 years fixed at your locked note rate, and 30 year amortization. A note modification is done when construction is complete. This simply involves a notarized signature on a few documents to be recorded. If someone had sold their current home, they could pay down the principle prior to modification, so the 30 year loan would have a lower payment. Being a single close construction loan, just as with our programs 1, 2 and 3, the loan file is not redocumented, and the property is not re-appraised.