A short-term loan used to fund building a new home. Funds are released in stages as construction progresses, then typically converted to a permanent mortgage at completion.
A construction loan finances the actual building of a home, not the purchase of an existing one. Unlike a regular mortgage where you receive the full loan amount at closing, construction loans release funds in stages — called draws — as your builder completes each phase of work.
Construction loans are typically short-term (12–18 months) and interest-only during the build. You only pay interest on the amount that's actually been drawn so far. Once construction is complete, the construction loan either gets paid off by a separate permanent mortgage, OR it converts automatically into a regular mortgage — that's called a construction-to-permanent loan or single-close.
These loans require more documentation than a standard mortgage: detailed construction plans, builder contracts, a fixed budget, and often a higher down payment.
Example
You're building a $600K custom home with a $480K construction loan (20% down). During construction, you pay interest only on what's drawn: month 1 might draw $50K (interest ~$292), month 6 might draw $300K total (interest ~$1,750). At completion, it converts to a 30-year fixed mortgage.
Also known as
construction-to-permanent loan, single-close construction loan, builder loan