Extension Fees: A Construction Loan's Dirty Secret

Most residential construction projects are financed through lending institutionsMost residential construction projects are financed through lending institutions. When choosing a lender, most consumers focus on the interest rate. However, a key component to the loan is the bank's policy on extensions. Typically, banks offer homeowners 12 month construction terms. The majority of people finish within this timeframe, give or take a month. But what happens if the home is not finished and additional time is needed? This is where extension fees come into play.

An extension fee is a fee charged by the bank for extending your loan. Extensions can vary from one to six months depending on your unique situation. Because most people are unaware of these fees, they do not inquire about them prior to signing the loan documents.

What ends up happening is that people reach the 12 month maturity date, and tell the bank they need several more months. The bank says, "Sure! That will be $1,800 a month until you complete." The bank will usually take the fee from a remaining line item in your construction loan. However, each month that passes means you have less money in your budget (or checkbook if you paid the fee out of pocket). Not all banks charge $1,800 per month - but some do. The fee may be as small as several hundred dollars and as much as several thousand. With such a wide variance, you owe it to yourself to investigate this matter prior to closing your loan.

While an extension fee may not break your checking account, it will impact your project. Each time you request an extension, less money is available for your home. Unfortunately, some banks count on you not finishing in time. Why? Because they make money charging extension fees. So, how does one avoid extension fees? The simplest answer is to finish on time. Common circumstances that delay a project are:

Not receiving the building permit in a timely fashion


Contractor-related issues

Mechanic's Liens

Changes your home plans that make the project more labor-intensive

Additions to the structure that add time onto your schedule

Losing control of the project

How does one avoid these common pitfalls? This begins with developing a plan and sticking to it. The success of a construction project starts in the beginning with the planning stage. Once you have chosen your home plan, stick to it to avoid cost overruns and time delays. Select the right contractor(s) for the job and monitor them closely to remain on schedule. It is important to remember that there will be delays even in the perfect project. But excessive delays - the ones that bring a project to a halt - will result in extending your construction loan.

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