A construction loan (also known as a “self-build loan”) is a short-term loan used to finance the building of a home or another real estate project. The builder or home buyer takes out a construction loan to cover the costs of the project before obtaining long-term funding. Because they are considered relatively risky, construction loans usually have higher interest rates than traditional mortgage loans.
Construction loans can allow a borrower to build the home of their dreams, but—due to the risks involved—they have higher interest rates and larger down payments than traditional mortgages.
If a construction loan is taken out by a borrower who wants to build a home, the lender might pay the funds directly to the contractor rather than to the borrower. The payments may come in installments as the project completes new stages of development. Construction loans can be taken out to finance rehabilitation and restoration projects as well as to build new homes.
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