📘 What is a Construction Loan?

A Construction Loan is a short-term, high-interest loan used to finance the building or renovation of a real estate property. It covers the cost of land, labor, materials, and other hard and soft construction expenses.

Unlike traditional mortgages, construction loans are issued in incremental “draws” as different phases of the project are completed and verified.

📌 When and Why It’s Used

Construction loans are commonly used by developers, investors, or homeowners planning new builds or major renovations. They help finance construction costs upfront, allowing the borrower to complete the project before securing permanent financing.

Lenders release funds in stages to reduce risk and ensure the project stays on track. The loan is typically refinanced into a long-term mortgage upon completion.

🧮 How It’s Calculated or Applied

The total construction loan amount is based on the projected cost of the build, often including hard and soft costs, plus a contingency buffer. The borrower submits draw requests at key construction milestones, verified by an inspector.

Interest is usually paid only on the disbursed amount, not the full loan balance. Upon completion, borrowers can refinance or repay the loan with a take-out mortgage.

This structure helps control borrowing costs and provides financial flexibility throughout the build.

✅ Pros

• Provides essential funding for large construction projects
• Interest-only payments reduce initial cash flow burden
• Draw schedule ensures funds are released responsibly

⚠️ Cons

• Higher interest rates than traditional mortgages
• Requires detailed documentation and inspections
• Short-term nature means refinancing is often necessary