CONSTRUCTION LOAN
Back to GlossaryDefinition
A short-term, often interest-only loan used to finance building a property, replaced by permanent financing when completed.
Summary
A construction loan is a specialized, temporary financing tool used during the building phase of a property. Unlike traditional mortgages, these loans typically require interest-only payments during construction and have variable interest rates. The loan funds are released in stages as construction milestones are completed, with the lender inspecting progress before each disbursement. Once construction is finished, borrowers must either pay off the loan in full or convert it to a permanent mortgage, often called a 'construction-to-permanent' loan.
Usage Context
Understanding construction loans is essential when studying real estate development, construction financing, commercial lending, and project management in real estate contexts.
Common Confusions
- Thinking construction loans work like regular mortgages with principal and interest payments
- Assuming funds are available all at once rather than in scheduled draws
- Confusing construction loans with home improvement loans
- Not understanding that construction loans must be replaced or converted when building is complete
- Believing construction loans have the same qualification requirements as permanent mortgages
