Construction interim loans are short-term debt instruments securitized by the project and, in most cases, contingent upon subsequent, long-term financing.
Term: These construction loans typically range from a short 6 month term to usually not more than 5 years. The most common length of term is usually 3 years.
Rate: Interest rates will often float over a defined loan index for the term of the loan and adjust or reset at maturity. In some instances, the rate can also be fixed.
Amortization: These loans are primarily interest only and do not amortize over the loan term.
Prepayment Penalties: There usually are prepayment penalties associated with these types of loans. However, there are many programs available that will waive these fees if the loan is converted into permanent financing (which is often the case).
A construction loan is a short-term loan for the building construction on real estate property. Construction loans are usually not standardized so the lender must know more information about the planned construction before they will lend you money. This is known as a story loan, since the lender must know the story behind the construction project. The payments during construction are interest only payments and the full amount is due after completion of the project. The interest is usually a variable rate for construction loans. Sometimes a borrower might be willing to pay a higher rate on the construction loan if the lender can transition them to a long term, more permanent form of financing after the project is completed. A higher rate payed on the contruction loan generally translates into better mortgage terms and a better rate lock from the lender in the permanent financing.