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Glossary of Notary Public, Mortgage, Signing Agent, and Loan Signing Terms.

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Common Terms 1   Common Terms 2

Construction Loan

Function: noun

Definition 1:
A short-term interim loan for financing the cost of construction. The lender advances funds to the builder at periodic intervals as the work progresses. A construction loan would typically be paid off once the building has been completed and refinanced with a loan that is based on the completed value of the property. Or, the construction loan might be paid off upon sale of the property. Construction loans are made on a more individually based scenario based on the business plan of the contractor. The interest rate on a construction loan is generally higher than on a standardized mortgage product since there is a higher degree of risk and also because of the short term nature of the loan. The amount of the total cost that the bank is willing to lend is up to negotiation and can vary widely. If the builder owns the land, that would constitute a considerable form of equity which would be good collateral to borrow against.