Here is the money problem, Patriot Nation: you are about to pay for a rate reduction on a loan that does not exist yet. During the build you only pay interest on the money actually drawn, so points spent on the construction phase buy almost nothing, while points spent on the permanent phase save you money for decades. Get the timing right and the points earn their keep. Let's break down where the money actually works.
PATRICK'S QUICK ANSWER
Points on a construction loan are more complex because the rate and terms shift when the loan converts from the build phase to the permanent mortgage. Buying points can lower the construction period rate, but the benefit depends on how long you build and whether the points carry over to the permanent loan. I review the loan documents line by line and compare the break-even across both phases. The right call protects your budget through the whole build. Ask Patrick how points on construction loans would work for your loan.
Construction loans have an interest-only phase during building. Points typically apply to the permanent phase on a construction-to-permanent loan.
The timing of when you pay points matters. On a single-close construction-to-permanent loan, you can lock the rate and buy points at the start. On a two-close loan, points apply to the permanent financing later. Patrick Kevin Fagan helps new construction buyers in San Antonio evaluate loan options.
Construction Phase
The term to know is interest-only draw: during the build, you pay interest only on the amount actually drawn, and the balance grows as construction progresses. The meaning: the rate during construction is typically variable, tied to a benchmark plus a margin, and the loan balance is uncertain until the build finishes. The money part: points are not directly relevant here because you would be buying a rate reduction on a balance that keeps changing, and the interest-only nature means the savings are small. The real-world consequence: a point spent on the construction phase is mostly wasted money, because you are paying for a rate you barely use on a loan amount that does not exist yet.
Permanent Phase Points
The term to know is conversion: the moment a construction-to-permanent loan turns into a standard amortizing mortgage. The meaning: once construction is complete and the loan converts, the points you purchased take effect and the rate reduction applies to the permanent loan you carry for years. The money part: on a single-close construction-to-permanent loan, you lock the permanent rate upfront, and the points you buy at the start apply to that permanent phase; on a two-close loan, you make a separate lock and point decision for the permanent mortgage. The real-world consequence: this is where points earn their keep, because the permanent phase is the loan you actually live with, and a lower rate on it saves money every month for decades.
CTP Loan Points
The term to know is construction-to-permanent, or CTP: one loan that finances the build and converts to a permanent mortgage when the build is done. The meaning: a CTP loan lets you lock the rate and buy points before construction starts, which can be smart if you expect rates to rise while you build, because you lock in today's pricing. The money part: the catch is the timing gap, you are paying upfront for a rate you will not use until construction is complete, so the break-even analysis has to start when the permanent loan begins, not when you pay the points. The real-world consequence: buyers who skip that timing analysis either overpay for a construction-phase rate they barely use or miss the chance to lock a permanent rate before it moves, so run the break-even on the permanent phase before you commit.
Ask Patrick about points on construction loans
Get a straight answer on points on construction loans and whether paying points makes sense for your loan.
