What Is an End Loan?
An end loan refers to a specific type of long-term loan that an individual uses to pay off a short-term construction loan or other form of interim financing.
How an End Loan Works
Although an end loan can have interest-only or other features that delay the repayment of principal, at some point it begins to amortize. This differs from construction loans or other forms of interim financing, which are typically interest-only loans that require full repayment of principal and accrued interest only upon disbursement of funds from the end loan.
An end loan might be part of a combination or construction/end loan, which allows a borrower to deal with only one lender. If the borrower works with only one lender, they will file only one credit application and generally pay only one set of loan settlement costs. However, there are also disadvantages to dealing with only one lender in a combination or construction/end loan. The major disadvantage of working with a single lender – as opposed to multiple lenders – is that the borrower cannot shop around for the best deal after the interim construction financing.
[Important: An end loan is used to pay off short-term interim financing because it generally has a lower interest rate than the financing.]
How Borrowers Use End Loans
As borrowers take out end loans in order to pay off short-term loans, the end loans often appear in conjunction with construction loans, which are short-term loans that a borrower can take out in order to finance the building of a home or other real estate project. Construction loans can help finance a project before other forms of funding are available to a borrower, but the construction loan often carries high interest rates, as lenders consider them more risky than a traditional mortgage. They also carry their own stipulations. For example, they may require that the borrower pay off the entire balance by the project’s completion or that a certain amount of payment be made on the interest.
Construction loans are often taken out by builders or home buyers who decide to custom-build their own home. Once the construction of the building finishes, the borrower can refinance the loan. Borrowers typically choose to do this due to the higher interest rates charged for construction loans. By taking out an end loan and using it to pay off the construction loan, the borrower saves money based upon the difference in interest rates between the two loans.