11 Apr 2022

How Is Interest Charged on Construction Loans?

Construction Loans

Construction loans have a different set of requirements than residential mortgages. They also have different loan terms. The construction loan finances building a new home or multi-unit structure. These projects take six to 12 months to complete. The loan remains open for the same amount of time. When the construction crew completes the project, the loan becomes due.

An owner-builder can receive approval for a $500,000 construction loan. However, lenders disburse the funds in increments. Thus the interest on construction loans accrues differently. In a way, these loans act as a home equity line of credit. To start the project, construction teams require a deposit. That amount can come out of the loan. In many cases, the deposit ranges from 5% to 6.5% of the total project. Once the borrower requests and receives the funds, the interest rate clock starts ticking on that amount. As the construction team continues reaching milestones, every drawdown starts accruing interest too. 

Borrowers have no obligation to borrow the entire amount approved by the lender. Thus, they only pay interest on the amount that they use. 

Mortgage House finances construction projects for investors and owner-builders. Our loan specialists have the tools to move the process along. Plus, they help applicants gather their documents and prepare beforehand in addition to understanding home loan rates.

Interest on Construction Loans Conclusion

The interest on construction loans is straightforward. Since the loan term ends when the crew completes the project, the loan only accrues interest during that time. For more details, contact our Mortgage House loan specialists.

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