Definition
Construction loans finance active building with funds released at completion milestones. You typically pay interest-only during construction, then convert to a permanent mortgage when finished. It's designed for new-home financing with builder involvement.
Where you’ll meet it
Which upgrades are worth it, and which will I regret?
See it in Buying new construction · Step 3About this term
Construction loans are specialized products structured for active building. Lenders release funds (draws) at predetermined construction milestones verified by inspections. Borrowers typically pay interest-only during construction, with draws usually occurring monthly or at completion of specific phases. After construction completes, the loan either converts to a permanent mortgage or is refinanced. Construction loans carry higher rates, require detailed construction plans and contractor information, and demand builder experience verification.
Pro Tip
Construction loans are costly; if possible, use a construction-to-permanent loan that converts to a mortgage, avoiding two separate closing processes.
Example
You purchase a lot and obtain a $300,000 construction loan. Funds are drawn at foundation completion ($60,000), framing ($90,000), roofing ($60,000), and substantial completion ($90,000), with interest-only payments during the 8-month build.