Construction Loan
A short-term loan that funds new home or major addition construction in draws, then converts to or is replaced by a permanent mortgage.
Quick answer
Construction Loan: A short-term loan that funds new home or major addition construction in draws, then converts to or is replaced by a permanent mortgage. Typical cost: Rate typically prime + 1%–2%; 12 month term; 1% origination..
Why it matters
Construction loans require 20–25% down, detailed plans, and ongoing inspections — far more complex than a refinance.
Typical cost
Rate typically prime + 1%–2%; 12 month term; 1% origination.
Pros
- • Funds large new-builds or additions
- • Single-close versions roll into mortgage
Cons
- • High down payment
- • Strict draw schedules
- • Variable rate during build
Common uses
- • New custom homes
- • Major additions and tear-downs
Alternatives
Cash-out refi after buildHELOC for smaller scopes
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Frequently asked questions
- How does a construction-to-perm loan work?
- Single closing, single set of fees; converts automatically to a mortgage when the home is finished.
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