Construction Loans
A construction loan is short-term loan that is used to finance the construction of a new home. During the term of the loan the lender disburses payments to the builder as the work progresses and the borrower makes interest payments on only the funds that have been disbursed to the builder. Typically, the construction loan is refinanced into a permanent loan after the home is completed.
Advantages
- Allows the consumer to finance the construction of a new home through staged payments to the builder
- Payments due during the construction period are typically interest only
Disadvantages
- Construction loans charge a higher rate of interest than a first mortgage loan
- A construction loan requires a separate closing and the payment of closing costs