A construction loan is a short-term residential loan that provides borrowers with the funds needed for the construction or renovation of their homes. Funds are typically drawn in stages as the project progresses. The loan usually lasts for a year, during which you are expected to complete the project and receive the certificate of occupancy.
This type of loan carries more risk than other residential mortgages because the real estate being financed is not yet existed in the first place. To make up for this risk, construction mortgages can come with a higher interest rate. As such, borrowers typically refinance their initial loans with a long-term permanent residential mortgage once the property is built.