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Construction loans are financial instruments that are used to finance
real estate construction.
Residential Construction LoansIn the residential real estate market, there are two ways to finance construction: 1) via two loans, an initial construction loan that covers the construction period and a follow-on permanent loan that is used to pay off the construction loan; or 2) via a construction-to-permanent loan where the construction loan is converted to a mortgage after the certificate of occupancy is issued.
In both cases, the construction of the home is financed by the construction loan, which the lenders pay out in stages as the builder needs funds. The lender must, therefore, monitor the builder's progress, which is one reason why fees on construction loans are higher than on conventional loans. During the construction period, you'll typically have to pay interest-only payments based on a variable rate.
For home buyers that are planning to sell their current home once their new home is built, a bridge loan may be a good option. In residential real estate, bridge loans are used to span the time between when buyers buy a new home and when they can sell their old home. When paired with a construction loan, the bridge loan can be used as a down payment. To find rates on construction loans and bridge loans, check out hsh.com. For more information about construction loans and answers to frequently asked questions about these loans, visit the Mortgage Professor. Commercial Construction Loans
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