A construction loan is specifically designed to fund the construction or renovation of a property. It works by providing the necessary funds in stages or draws throughout the construction process. Initially, the lender approves a loan amount based on the estimated project cost and borrower qualifications. As the construction progresses, funds are disbursed in stages to cover the expenses incurred.
During the construction phase, borrowers typically only pay interest on the funds disbursed. Once the construction is complete, the loan may transition into a long-term mortgage or require refinancing. Construction loans offer the flexibility and financial support needed to execute building projects, ensuring that funds are available at each stage of construction until the property is finished. Lenders often work closely with borrowers and construction professionals to monitor progress and ensure funds are allocated appropriately throughout the construction process.