What is a construction loan?

A construction loan is a short-term financing option specifically designed to cover the costs associated with building a new property or undertaking significant renovations. This type of loan typically provides funds in stages, known as "draws," which coincide with the completion of various construction phases. Borrowers pay interest only on the disbursed amount during the construction period, making it financially manageable.

Once the construction is complete, borrowers often transition into a long-term mortgage to pay off the construction loan. This structure allows developers and homeowners to manage cash flow effectively while their property is being built. The focus on short-term financing differentiates construction loans from long-term mortgages, which are intended for existing residential properties or land purchases. Therefore, the definition provided aligns perfectly with the characteristics and purpose of a construction loan.