What type of loan is a Construction Loan?

A construction loan is indeed a short-term financing solution specifically designed to fund the costs associated with the construction of a property. These loans are typically used by developers and builders to cover various expenses such as labor, materials, permits, and other costs that arise during the construction phase.

Construction loans generally come with a higher interest rate compared to traditional long-term financing options due to the increased risk involved in funding a project that has not yet generated revenue. Once construction is completed, the construction loan can often be converted into a permanent mortgage, but during the construction phase, the focus is on providing the necessary capital to complete the project in a timely manner. This type of financing is crucial for developers who need immediate funding to begin building, making it an essential tool in real estate development.