For most people, buying or building a home requires some sort of financing. Such financing typically consists of a mortgage and different types of mortgages have their own unique advantages, disadvantages, and requirements.

When building your new home, it’s a given that somebodyneeds to pay the construction costs; there’s no way around it! A draw mortgageis one of the ways which allows you to pay your new home’s construction costs.This type of mortgage is referred to as a draw mortgage because the builder progressively“draws” on the mortgage throughout construction; i.e. the mortgage companyissues funds to the builder at specified intervals throughout the constructionprocess. The time when a mortgage is drawn on can vary, but a typical drawmortgage consists of three draws: at the frame or rough-in completion when yourhome is about 35% done, during the finishing stage when your home’s exteriorhas been completed and work on the interior finishing is about to commence, andfinally at the completion stage after the final inspection is complete andyou’re in possession of your new home. To ensure that adequate progress has been made before funds arereleased to the builder, each draw requires progress inspection report. In thecase of the final draw, it is not released until all the relevant draw mortgagepaperwork has been signed and the home has passed a completion inspection.

A draw mortgage can be more convenient for future homeowners. Since a draw mortgage is signed and in your name from the very beginning, you own the home from the moment you sign for your mortgage! Another factor that benefits future homeowners is that a draw mortgage may be used to secure a fixed interest rate on your mortgage. On the topic of interest rates, depending on the terms of your particular draw mortgage, the builder may actually be the one paying the interest accrued during construction as they are the ones drawing on your mortgage to build. However, it’s important not to take anything for granted and always consult with your builder to confirm your options and determine the responsibilities of everyone involved. 

While all the above may make it sound like a draw mortgage is your best option when building your new home, there are a few things to keep in mind. A draw mortgage may sometimes be harder to obtain, since they tend to be riskier for the lenders issuing the mortgage. It’s also worth noting that in the case of a draw mortgage, any design changes or upgrades you decide to go for throughout the construction process will not be covered by your mortgage- once the first advance is paid the loan is fixed and cannot be changed in any way.

Draw mortgages definitely have their advantages, but they’re certainly not a one-size fits all solution. At Eric’s Homes we’ve dealt with all kinds of mortgages and financing options throughout the years, so get in touch with us today if you’re thinking about applying for a draw mortgage and we’ll help point you in the right direction.