Construction mortgage loans are a short term loan that finances the cost of constructing a new building. Once the building is completed the construction loan is paid off. Construction loans are meant to cover only the cost of building a new building. The loan is paid off once building is finished. The construction is usually paid from the proceeds of a conventional mortgage loan.
Usually you only pay interest during the construction phase. When the construction is completed the balance of the loan is due. A certificate of occupancy will then be issued. A certificate of occupancy is issued by the local government. It certifies that the building meets all the building and zoning laws and is ready to be occupied.
When building a new home the loan is usually part of a construction-to-permanent financing program. With these the loan automatically turns into a mortgage loan once the certificate of occupancy is issued. With construction-to-permanent financing there is only one application and one closing.
Construction loans typically have a variable rate of interest. The interest rate is often tied to the prime rate or a similar short term interest rate. During construction you will only have to make interest payments. If you already own the land that the building is going to be built on then you can use the land as equity on the loan.
If you currently own a home that you are selling you can use a bridge loan to raise the funds for a down payment on your new home. A bridge loan is a temporary loan. A bridge loan bridges the gap between the price of your new home and your new mortgage in case your current home has not sold yet. Your existing home is used to secure the bridge loan.
When you take out a construction loan you and the builder will agree to a draw schedule. The draw schedule is the schedule of payments that the builder will receive. The draw schedule will be based on the different phases of the building process.
Construction mortgage loans makes the building of new homes possible. Without them there would not be sufficient capital to finance new development. These loans are the mechanism that keeps the building industry viable. If you need a loan consult with your banker and your construction company to come up with a loan plan for your project.