Definition
A construction loan is a short-term loan to cover the costs of building a new home. Once the house is complete, the loan is typically paid off with a traditional, long-term mortgage.
Understanding Construction Loans
A construction loan comes into play when you're building a new home. It provides the funds needed for construction before a permanent mortgage takes over. In simple terms, it acts as a short-term loan to cover building costs. Example: If building costs are $300,000, the loan might cover this amount during construction. It's not meant for purchasing an existing home. One common misconception is that construction loans convert automatically to a mortgage; usually, a separate mortgage process follows completion. They are typically disbursed in stages as construction progresses, ensuring funds are available when needed.
