construction loan
A short-term loan financing the building of a home or other real property, typically converting to a permanent mortgage upon completion.
Example
“The builder received a construction loan that disbursed funds in stages as the home was built, converting to a 30-year mortgage at completion.”
Memory Tip
CONSTRUCTION loan = temporary financing while building. Converts to a mortgage when done.
Why It Matters
Construction loans are crucial for anyone planning to build a new home because they provide the necessary funds before the property is complete and ready for traditional mortgage financing. Understanding how construction loans work helps borrowers manage cash flow during building and prepare for the transition to permanent financing.
Common Misconception
Many people assume construction loans have the same interest rates and terms as traditional mortgages, but they actually have higher interest rates and shorter repayment periods since the lender takes on greater risk during the building phase. Borrowers often do not realize they will need to qualify for the permanent mortgage separately before construction is finished.
In Practice
A family obtains a construction loan for $300,000 to build a home, borrowing funds in stages as construction progresses over 12 months and paying only interest on the borrowed amount each month. Once the home is completed, they secure a permanent 30-year mortgage at a lower rate to pay off the remaining construction loan balance and finance the property long-term.
Etymology
CONSTRUCTION (building) LOAN. A LOAN specifically for CONSTRUCTION of a property.
Common Misspellings
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See Also
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