What is a construction loan?

A construction loan is usually a short-term loan that provides funds to cover the cost of building or rehabilitating a home. In general, construction loans have higher interest rates than longer-term mortgage loans used to purchase homes. The money borrowed through a construction loan is typically provided in a series of advances as the construction progresses. Payments sometimes start on a construction loan six to 24 months after the loan is made.

You can pay off the balance in a lump sum or you may be able to convert the loan to a conventional mortgage loan, though if your construction loan does not automatically convert you may have to reapply for a new loan. Your choices will depend on the lender and your credit history when you apply, so make sure to compare multiple loans, terms, and features.

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