Loans
Construction Loan
A short-term loan used to finance the building of a new home. Funds are released in stages as construction milestones are met, and the borrower typically pays interest only during the construction period. Once the home is complete, the construction loan converts to a permanent mortgage or is paid off with a separate mortgage. Construction loans usually require higher down payments and credit scores than standard home loans.
Why It Matters
Construction Loan is a concept every mortgage borrower should understand before signing loan documents. The terms of your mortgage — including factors like construction loan — directly determine your monthly payment, total interest paid, and financial flexibility for the next 15-30 years. Taking time to understand these terms puts you in a stronger negotiating position with lenders.
When evaluating loan offers, ask your lender to explain how construction loan affects your specific loan scenario. Get it in writing on your Loan Estimate form, and compare how different lenders handle construction loan — the differences can save or cost you thousands over the life of your mortgage.
Real-World Example
For a typical $300,000, 30-year mortgage at 6.5%, understanding construction loan can help you evaluate whether you're getting the best possible terms. Even small variations in loan terms translate to significant dollar amounts over 360 monthly payments.
Pro Tip
Before your loan closes, make sure you fully understand how construction loan works in your specific mortgage. Ask your loan officer to walk through it — they're required to explain every term on your Closing Disclosure.