Construction Loan

A construction is a short-term loan used to finance the building or renovation of a property. It covers the costs associated with the construction process, including materials, labor, and permits. Here are the key points to remember:

1. Short-Term Nature: Construction loans typically last for the construction project, usually six months to a year. Once the construction is complete, the loan becomes a permanent mortgage or must be paid off.
2. Draw Schedule: Funds are disbursed in stages, known as "draws," as construction milestones are reached. This ensures funds are available and helps control the project's progress.
3. Interest Rates and Payments: Interest is usually charged only on the funds drawn. The borrower typically makes interest-only payments during the construction phase.
4. Higher Interest Rates: Construction loans generally have higher interest rates than standard residential mortgages. This is often because a construction loan carries an increase for the lender.
5. Approval Process: Before approving a construction loan, lenders require detailed plans, a construction timeline, and a budget. This comprehensive list of requirements ensures that the borrower is well-informed and prepared for the process.
6. Conversion Options: Upon completion of the construction, the loan can be converted into a permanent mortgage, also called a "take-out" loan (construction-to-permanent loan), or paid off with a separate mortgage (stand-alone construction loan). This flexibility empowers the borrower to choose the best option for their situation.