Construction Loans: How Do They Work? – SmartAsset

A construction loan is a specific type of loan for people who are building a home. Compared to mortgage loans, they tend to have shorter durations and higher interest rates, and the loan is paid directly to the building contractors rather than the homeowner. Many of these loans are construction-to-permanent loans, in which the loan is converted to a mortgage when the homeowner moves in. There two are other types as well, however: stand-alone and renovation construction loans. Note that construction loans cover not just the building costs, but also the cost of the plot of land, and sometimes other expenses such as design fees and permits. All told, construction loans are highly beneficial to people looking to build rather than buy.

Key Takeaways:

Construction loans are typical for when someone is buying a home and tends to be shorter in duration than a standard mortgage loan.
Renovation, construction-to-permanent, and stand-alone are the three primary types of construction loans.
Construction loans are helpful for first-time home builders to get what the assistance they need to complete their home.

“Whether you’re putting up a house from scratch or renovating, construction loans have quirks that differentiate them from a traditional mortgage.”