What Happens to Your Interest Rate When a Construction Loan Converts to a Permanent Mortgage?
Building a custom home can be exciting, but not knowing what will happen to your interest rate after construction can make financial planning difficult.
When a construction loan converts to a permanent mortgage, the interest rate may stay the same or change depending on whether you have a one-time-close loan, a two-time-close loan, and how your rate lock is structured.
In this guide, we’ll explain how conversion works, when your permanent rate is established, and what to review before construction begins.
Key Takeaways
- Rate Outcome: Your permanent interest rate may be established upfront or set later based on your loan structure and rate-lock terms.
- Loan Structure: A one-time-close loan generally converts without a second mortgage closing, while a two-time-close loan requires new permanent financing.
- Rate Lock: Extended locks, expiration dates, fees, and possible float-down provisions vary by lender and program.
- Timeline: Construction commonly takes many months, so delays can affect a rate lock and the final loan terms.
- Planning: Borrowers should compare the rate, closing costs, qualification requirements, and construction flexibility before choosing a structure.
Quick Answers
- Does the rate automatically change at conversion? No. Some loans keep the permanent rate established at closing, while others use a rate set closer to construction completion.
- Can the permanent rate be locked before construction starts? Often, yes. Availability, lock periods, fees, and conditions vary by lender.
- Can the rate decrease if market rates improve? Possibly. Some loans include a float-down option, but the rules and costs must be reviewed carefully.
- Is every construction-to-permanent loan structured the same way? No. The note, rate, payment calculation, conversion requirements, and closing structure can differ significantly.
At H & M Mortgage Group, LLC (NMLS# 2597016), we help borrowers compare construction financing options for custom homes and new construction throughout San Antonio, the Texas Hill Country, and statewide Texas.
The Loan Structure Determines What Happens to Your Rate
Here’s the thing…“construction-to-permanent loan” can describe more than one financing structure.
The biggest distinction is between a one-time-close construction loan and a two-time-close construction loan. That distinction matters because it affects when your permanent interest rate is set, how long it may be locked, and whether you must qualify for a second mortgage.
| Feature | One-Time Close | Two-Time Close |
|---|---|---|
| Number of closings | Generally one closing before construction | Construction closing followed by a permanent mortgage closing |
| Permanent rate | May be established upfront, subject to the loan’s lock terms | Usually set when the permanent mortgage is locked |
| Second qualification | Often limited to conversion conditions and updated documentation | Generally requires a new application and full underwriting |
| Closing costs | Generally one set of closing costs | May involve costs at both closings |
| Rate flexibility | Depends on extended-lock and float-down provisions | Permanent rate reflects available terms when the new loan is locked |
Our construction home loan overview provides additional information about how these loans can finance the lot, construction costs, and permanent mortgage.
How a One-Time-Close Construction Loan Affects Your Rate
With a one-time-close loan, you generally close on the construction financing and permanent mortgage before the builder begins work.
During construction, funds are released through scheduled draws. Your payment is commonly based on the amount disbursed rather than the entire approved loan amount. The exact payment calculation and rate during this phase depend on the note and lender guidelines.
Once construction is complete and the required conditions are satisfied, the loan converts to permanent financing. This may happen through a modification rather than a completely new mortgage closing.
If your permanent rate was locked at the original closing, conversion usually does not mean that the lender simply replaces it with the market rate available on completion day. The original lock agreement and loan documents control what happens.
But here’s the catch…a long construction period creates rate-lock risk. If the project takes longer than expected, the lock could expire or require an extension. Extensions may involve additional costs, and the available terms vary by lender.
What Is a Float-Down Option?
A float-down option may allow a borrower to receive a lower permanent rate if market rates improve before conversion.
Not every loan offers one. Some float-down provisions require a fee, allow only one adjustment, or become available only within a certain period before conversion. The new rate may also be based on a lender’s specific pricing formula rather than any advertised market rate.
And quite frankly, the words “float down” are not enough. We need to read the actual terms.
How a Two-Time-Close Construction Loan Affects Your Rate
A two-time-close structure begins with a short-term construction loan. After the home is complete, that loan is paid off with a new permanent mortgage.
The rate on the permanent mortgage is generally based on the market, loan program, borrower qualifications, and lock terms available when that second loan is arranged.
If market rates are lower at that time, the new permanent rate may be lower than the construction rate. If market rates are higher, the permanent rate may also be higher. There is no automatic protection unless a specific forward-lock or other rate-lock arrangement was established.
The second loan also means another underwriting decision. Income, assets, debts, credit, employment, property value, and other documentation may need to be reviewed again under the guidelines in effect at that time.
A two-time close can provide more flexibility when selecting the permanent loan. That flexibility comes with uncertainty, possible additional closing costs, and the risk that the borrower’s financial profile or program guidelines may change before completion.
What Determines Your Permanent Mortgage Rate?
Here’s what most people don’t realize…the conversion date is only one piece of the rate decision.
Several factors may affect the permanent rate and available terms:
- Loan structure: One-time close or two-time close
- Rate-lock period: Longer locks may be priced differently and may have additional conditions
- Credit profile: Credit history and qualifying scores can affect pricing
- Debt-to-income ratio: The relationship between qualifying income and monthly obligations matters
- Property use: Primary residences, second homes, and investment properties may be treated differently
- Loan amount: Conforming limits vary by county, while larger loans may require jumbo financing
- Loan program: Conventional, VA, FHA, jumbo, and other programs follow different rules
- Construction timeline: Delays may create lock-extension or requalification issues
Custom builds in areas such as Boerne, Bulverde, Spring Branch, Fair Oaks Ranch, and other Texas Hill Country communities may also involve larger lots, specialized plans, or higher project budgets. If the final loan exceeds current conforming limits, jumbo home loan requirements may apply.
What Happens During the Construction Phase?
A construction loan does not usually fund the entire project on the first day.
Instead, the lender releases funds in draws as work is completed. Inspections commonly confirm progress before the next draw is approved. Borrowers often make interest-only payments based on the funds already advanced, although payment structures vary.
Before permanent conversion, the lender may require:
- A final inspection or completion report
- A certificate of occupancy or local equivalent
- Confirmation that construction liens have been addressed
- Updated homeowners insurance
- Final title documentation
- Updated income, asset, employment, or credit information
- Verification that the project stayed within the approved budget
If the final project cost increases, the borrower may need to cover the difference, document additional funds, or request approval for a loan adjustment. Approval is not automatic.
Why the Interest Rate Is Only Part of the Decision
It’s not just about the interest rate…
A loan with an appealing initial rate may have a shorter lock period, stricter builder requirements, higher extension costs, or fewer options if construction changes. Another loan may carry different pricing but provide a longer lock or a clearer conversion structure.
Before choosing a construction loan, compare:
- The construction-phase rate and payment method
- The permanent rate and when it is established
- The lock expiration date
- Extension costs and approval requirements
- Float-down availability and restrictions
- Contingency reserve requirements
- Draw procedures and inspection rules
- Builder approval requirements
- Closing costs for one closing versus two
- Requalification requirements before conversion
For eligible military and veteran borrowers, construction financing may sometimes be paired with VA financing. These programs can have additional lender requirements, so reviewing the broader VA home loan structure early can help establish realistic expectations.
Questions to Ask Before Locking Your Construction Loan
Before signing the loan documents, ask for clear answers to these questions:
- Is this a one-time-close or two-time-close loan?
- When is the permanent interest rate established?
- Does the construction phase use the same rate as the permanent phase?
- How long does the rate lock last?
- What happens if construction runs beyond the lock period?
- Is a float-down option available, and how is it calculated?
- Will we need to qualify again before conversion?
- What documents are required at completion?
- Could changes to the plans, budget, or builder affect conversion?
- Are there additional fees when the loan becomes permanent?
The answers should be in the loan documents or written program terms. Verbal explanations are helpful, but they should match the actual agreement.
Review Your Construction Financing Before You Break Ground
A construction loan can work well when the rate strategy, project budget, builder schedule, and permanent financing all support each other.
We invite you to call, text, or email us before finalizing your construction contract. We can review your scenario, compare one-time-close and two-time-close options, and explain the pre-approval and conversion requirements.
No hype…No scare tactics…Just honest conversations and education so you know what to expect before construction begins.
Frequently Asked Questions
What happens if construction is delayed beyond the rate-lock expiration?
The lender may offer a lock extension, but additional costs or updated approval conditions may apply. If an extension is unavailable, the permanent rate could be based on the terms available when a new lock is established.
Will I need to requalify before the construction loan becomes permanent?
A two-time-close loan generally requires full qualification for the new permanent mortgage. A one-time-close loan may require updated documents and confirmation that the original approval conditions remain satisfied, depending on the program and lender.
Can VA or FHA financing be used for a construction-to-permanent loan?
VA and FHA construction-to-permanent programs may be available through lenders that offer them. Borrower eligibility, property requirements, builder approval, construction administration, and lender overlays can limit availability.
Is another appraisal required when construction is finished?
The lender commonly requires a final inspection or completion certification to confirm the home was built according to the approved plans. A new or updated appraisal may also be required if the project, value, loan structure, or program guidelines changed.
Can I switch lenders before the permanent mortgage begins?
A two-time-close structure may allow you to select a different lender for the permanent mortgage, subject to qualification and payoff requirements. Switching lenders on a one-time-close loan may require replacing or refinancing the existing construction debt rather than completing the planned conversion.
John Hudson
John Hudson (NMLS #261659) is Co-Founder and CEO of H&M Mortgage Group, LLC (NMLS #2597016), an independent mortgage brokerage based in San Antonio and serving Texas. A mortgage professional since 1998, he focuses on VA, conventional and FHA loans, with additional experience in down payment assistance, jumbo and construction financing.
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