Major Types of Construction Loans

Building a new home is exciting. However, if you are unfamiliar with the available types of construction loans, your enthusiasm can be affected negatively. If you need financing for your construction project, here are the major types of construction loans to know about.


This is a loan take to pay for a construction project. On moving in, the loan balance is converted by the lender into a permanent mortgage. Basically, these are like two in one loans. While constructing the building, the borrower of this loan pays the interest of their outstanding balance only. During construction, the interest rate varies. The prime rate influences moving down and up of the interest rate. For instance, if short interest rates are decreased or raised by the Federal Reserve during construction, the interest rate of the loan are affected.

Construction loan is converted into a permanent mortgage by the lender after a home has been built. A permanent mortgage is just like other mortgages. You have the freedom to choose an adjustable-rate loan or a fixed rate loan. The loan’s term is also specified and it can be 15 years or 30 years. It’s important to make mortgage rates comparison and shop when ready.

With most lenders, you will have to lock the maximum rate for your mortgage at the start of the construction project. Generally, a lender will require you to pay at least 20% of the amount expected for a permanent mortgage. In some cases, exceptions are made.

Stand-Alone Construction Loans

Stand-alone construction loans work well when they allow borrowers to make a down payment in a small amount. The first loan is for paying for the construction. On moving in, you take a mortgage that pays off your construction debt. Thus, you get two loans separately.

If you are a home owner without much cash to make down payment, this loan can be advantageous for you. It enables you to live in a home while building a new one.

Before taking any of these construction loans, it’s important to know that the lender will inspect the home under construction routinely. During construction, lenders pay builders in varying stages known as draws. Usually, an inspector or appraiser is sent to ensure that the construction project proceeds according to plan.

Nevertheless, when you chose the right lender and take out the right loan, you will own your dream home without struggles.

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