What Is a Construction Loan in Real Estate?
A construction loan is a short-term loan used to finance the building of a new home or major renovation. These loans release funds in stages, based on construction progress, and typically convert to a permanent mortgage after completion.
✅ How a Construction Loan Works
Unlike traditional mortgages, construction loans fund the building process in phases. Borrowers pay interest only on the amount disbursed, and inspections are required at each stage before additional funds are released.
- Short-term financing (usually 6–18 months)
- Funds released in construction “draws”
- Interest-only payments during construction
- Requires builder approval and project plans
💡 When a Construction Loan Makes Sense
Construction loans are ideal when you’re building a custom home, starting a major renovation, or purchasing land to develop. They provide flexibility for projects that can’t be financed with a standard mortgage.
- Building a new home from scratch
- Large-scale renovations or expansions
- Buying land and developing on it
- Partnering with custom home builders
- Financing major structural changes
Many borrowers refinance into a traditional mortgage or use a construction-to-permanent loan to avoid two closings.
📉 Risks of Construction Loans
- Higher interest rates than traditional mortgages
- More documentation and inspections required
- Construction delays can increase costs
- Project changes may require loan adjustments
If you prefer a smoother transition, consider a construction-to-permanent mortgage that automatically converts to a long-term loan.
🏠 Planning to build a new home or start a major renovation?
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