By: Carlos De La Rosa, Vice President, Commercial Banker II, Commercial Banking at City National Bank

The real estate market is a top of topic conversation these days during such a hot and competitive market. Getting your dream home might prove to be more challenging than ever. If you’re thinking of building or staying put and remodeling your dream house, this article is for you! This article helps explains what a construction loan is and options available to help assist with the financing.

First, some basics – how does a conventional mortgage differ from a construction loan? Conventional loans are based on the “as is” or fair market of the property. Construction loans are based on “as completed” or what the property will be worth once completed.

The most common way to finance the dream home is through a construction-to-perm loan. This is ideal when undertaking ground-up construction or doing major renovations/additions to the home. A construction loan can be used to cover the acquisition of the land, soft and hard costs related to the permitting and construction of the property. At times you will hear these loan s called single-close loans. During the construction period the loan is interest only and advances are made as the progress is made. Once construction is complete, the loan is converted to a permanent loan. This ensures you lock in your rate and avoid additional closing costs and fees once completed.

If you are only looking to remodel your home, a construction loan may not be the best option. In scenarios like these, my advice would be to explore a renovation loan. The most common in this scenario is to tap into the equity of your home via a home equity loan or line of credit.

If you choose to go down this road, get ready for an exciting process that at times will become very frustrating. One of the most important decisions you will need to make and help reduce frustration is the team. From the architect to general contractor to lender, be sure to do your homework and choose a team that has experience in projects such as the one you are about to embark on.