Borrowers typically make interest payments in line with the funds they've received to date, rather than interest payments based off the loan in its entirety. How a construction loan worksĪs opposed to one lump-sum payment with other loans, construction loans often provide financing in stages aligned with milestones in a construction timeline - typically, over a year.
For example, the borrower may not have a home to use as collateral because the home hasn’t been built yet.
The interest is typically higher compared to other loans because the investment comes with a bit more risk for the lender. What is a construction loan?Ī construction loan is typically a short-term, high-interest mortgage that helps finance construction on a property, which could include the cost of the land, contractors, building materials and permits. Why’s that? Construction loans are designed to help finance the construction - and sometimes renovation - of a property. That’s where a construction loan comes in. When it comes to building a home from scratch or purchasing and renovating a new property, you typically won’t be looking at your traditional, permanent mortgage. Any information described in this article may vary by lender. This article is for educational purposes only.
