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You should take out a mortgage to pay off the construction loan. Construction loans aren't meant to be a method of long-term financing. A first mortgage is a better choice than a home equity loan because you can borrow for longer periods, generally at a lower interest rate.
A typical home equity loan is a second mortgage. It carries a higher interest rate than a first mortgage because there is more risk to the lender. That's because the first mortgage has to be satisfied before any sale proceeds go toward satisfying the second mortgage. With no other lender having priority in the event of foreclosure, you've given the home equity lender all the benefits of being the primary lender.
Ask yourself, "What's in it for me?" It comes down to the loan terms. You should get better terms on a first mortgage than you would on a home equity loan.
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