What is a Construction Loan?

building your dream home

Article by Bank Rate!

If you can’t find the right home to buy, you might be thinking about how much
it will cost to build a new house or renovate the one you currently call home.
The process of borrowing the money to pay for this project is different from
getting a mortgage to move into an existing property. Here’s everything you
need to know about getting a construction loan.

So what is a construction loan?
A home construction loan is a short-term, higher-interest loan that provides
the funds required to build a residential property.
Construction loans typically are one year in duration. During this time, the
property must be built, and a certificate of occupancy should be issued.
Construction loans usually have variable rates that move up and down with
the prime rate. Construction loan rates are typically higher than traditional
mortgage loan rates. 

Unlike personal loans that make a lump-sum payment, the lender pays out the
money in stages as work on the new home progresses.