What type of financing do construction loans represent?

Construction loans represent short-term financing specifically designed to fund the building of a new property. These loans are typically taken out for a limited period, often around 12 months, and are used during the construction phase of a project. Once the home is built, the construction loan is usually paid off through a long-term mortgage or a permanent financing solution.

The nature of construction loans involves providing the necessary capital to cover the costs of materials, labor, and other expenses incurred while constructing the home. Because construction loans are meant to bridge the gap until permanent financing is secured, they often come with different terms and higher interest rates compared to long-term loans. Thus, the classification of construction loans as short-term loans accurately reflects their intended use and duration.