DEFINITION of 'Construction Mortgage'

A loan borrowed to finance the construction of a home and typically only interest is paid during the construction period. Once the construction is over, the loan amount becomes due and it becomes a normal mortgage. The money is advanced incrementally during construction, as construction progresses.

BREAKING DOWN 'Construction Mortgage'

Financing to build a new home typically comes in the form of a construction-to-permanent loan. This financing option has two parts: a loan to cover the costs of construction, and a mortgage on the finished home. The advantage of such plans is that you have to apply only once and you will have only one loan closing.

RELATED TERMS
  1. Construction Loan

    A short-term loan used to finance the building of a home or another ...
  2. Combination Loan

    1. A transaction consisting of two separate loans for the same ...
  3. Future Advance

    A clause in a mortgage which enables the lender to advance funds ...
  4. Tri-Party Agreement

    A business agreement between three separate parties. In the mortgage ...
  5. End Loan

    A permanent, long-term loan used to pay off a short-term construction ...
  6. 100% Mortgage

    A mortgage loan in which the borrower receives a loan amount ...
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RELATED FAQS
  1. How do construction loans work?

    Construction loans are obtained either by the prospective home owner or the actual builder. There are two types of construction ... Read Answer >>
  2. Does the FHA provide construction loans?

    Learn how you can save with FHA-insured construction and rehabilitation mortgages that allow you to finance construction ... Read Answer >>
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