Looking to build your own home? Even those who have taken out conventional mortgages will need some self-education when it comes to financing a custom project. We've gathered some important loan features and tips that you'll want to know about before choosing a loan program. Be sure to seek out a lender well-versed in all kinds of construction loans -- the more knowledge they have, the better advice you'll get on making the best choice for your situation.

What's your story?
Construction loans are often known as "story loans," meaning that the lender needs to know the narrative behind the loan. The borrower's motivations behind the proposed construction play a key role in the resulting interest rate and repayment options. Consequently, these loans are less cut and dried than a standard mortgage loan. The loans available depend on the kind of financing you're interested in as well as what type of project you're building.

How these loans work
In general, construction loans are variable-rate loans priced at a short-term interest rate. The borrower, the contractor and the lender establish a draw schedule based on the five to 10 recognized stages of construction, and interest is charged on the amount of money drawn to date. Borrowers can either take out a construction loan that automatically converts to a permanent mortgage when the house is finished, or structure two separate loans. Many construction loans can also be made to include the cost of the land as well as building the house.

One-time closing loan
There are many cost benefits in obtaining a one-time closing loan, also known as a construction-to-permanent loan, to finance your custom home. In this case, the construction loan becomes a mortgage loan, once your home is completed. You reduce your closing costs by wrapping the lot, construction, and permanent loan all into one closing, as well as additional fees for recording the mortgage, confirming credit and performing a title search.

On the downside, with a construction-to-permanent loan, the borrower does not get to shop around for the best rate on the market at the time the construction loan becomes a mortgage loan. For those who choose this option, the convenience and security of a known rate and closing cost savings are considered a reasonable trade-off for mortgage rate choice.

Construction-only loan
In a construction-only loan, the borrower applies for a construction loan, which is usually short term, ranging from six to 12 months, and pays the closing costs on that. There is an upfront fee required, generally 1-3% above prime. Only interest is paid during the building stage, and the entire principal amount is due at the end of the term. Once the home is completed, the borrower applies for a mortgage loan, either from the same or a different lender. Though there are separate closing costs on the mortgage loan, the borrower has the flexibility to seek the best rate, which is often lower than the construction-to-permanent rate.

Getting a good lock
Some lenders will let the borrower lock in a low rate during construction and then switch to another rate once the loan is converted into a mortgage loan. It is also sometimes possible to lock in a single rate for the life of the loan, which will be higher as a hedge against rising rates. That lock can be for three, six, nine or twelve months in advance. Also find out the cost, if any, for an extended lock, in case you run into construction delays.

Variable rates
Another option is an adjustable rate mortgage (ARM) that allows the borrower to lock in a rate for a specified period after which the rate will vary.  Be sure to find out what determines the ARM fixed period adjustment date. Is it the time from when the loan is locked, from when you close on the construction loan, or, for a mortgage loan, from when you move in? Depending on the answer, the interest rate guarantee period for the same ARM can change by months.

Construction term
Know the maximum time allotted for the type of construction you're planning. Larger homes may need more than 12 months to build. Find out what happens if it takes more than the construction term to build the home. Remember that extending your construction term doesn't automatically extend your lock. Extension fees can run up to 1/2 a point per month. Make sure to ask whether you will have to requalify, update your documents, and/or pay for new appraisals if your home is not completed within 12 months. Although you may have a construction period longer than 12 months, some lenders require updated documentation after this time frame. This could cost you extra time, money and aggravation.

There is nothing more exciting and, often, more challenging than building your own home. With careful planning and a knowledgeable lender, your construction loan can be one thing you don't have to worry about on the way to creating your custom nest.

For additional information, ConstructionLoanCenter.com offers a wealth of detail, including calculating building costs.  Another good resource is CreditLoan.com's construction loan section.