Definition of term
A construction loan is a type of loan that helps finance the construction of a new home. Construction loans are typically short-term loans, lasting for one year or less. During this time, the borrower will make periodic interest-only payments. Once the construction is complete, the construction loan will need to be paid off in full. Sometimes, the lender may roll the construction loan into a traditional mortgage loan. However, construction loans typically have higher interest rates than traditional mortgage loans, so shopping around for the best rate is vital before taking out a construction loan.