Construction Loan

In real estate financing, a construction loan is a short-term loan used to fund the building or major renovation of real property. Rather than being disbursed in a lump sum, the loan proceeds are typically released in stages, or “draws,” as construction progresses and work is completed. Once the improvements are finished, the construction loan is usually replaced or paid off by a long-term financing arrangement, such as a permanent mortgage. Because construction loans carry greater risk for lenders, they often have higher interest rates and require detailed plans, budgets, and inspections throughout the construction process.