Construction Loans Made Simple

Most custom homes are financed through a construction loan, designed specifically for building a home. Unlike a traditional mortgage that provides a lump sum, a construction loan is released in stages — called “draws” — as your home progresses. For example, funds may be distributed after the foundation is poured, once framing is complete, and again when finishing work is underway. Each step ensures that your loan matches the progress of your build.

Once construction is complete, that loan is often converted into a permanent mortgage, making it one seamless process. This means you only need to go through financing once, with your construction loan smoothly transitioning into your long-term home loan.

 Why it's Not as Complicated as it Sounds

Think of it in two simple phases:

1. Construction Phase – Funds are released gradually to cover each stage of the build. You’ll typically make interest-only payments during this time.

2. Mortgage Phase – After your home is complete, the loan “converts” into a standard mortgage, with regular monthly payments — just like buying a finished home.

This structure ensures your financing grows alongside your home, making the process smooth and predictable.

 OptionsThat Offer Flexibility

Depending on your lender and loan program, you may encounter features that provide additional peace of mind:

• Two-Time Close Construction Loan – With this option, you’ll close on one loan for construction and a separate loan for your permanent mortgage once the home is complete. While it involves two closings, the benefit is flexibility: you can shop for the best mortgage terms after construction, especially if your financial situation or interest rates change.

• Float-Down Interest Rate – A float-down option allows you to lock in a rate today but still take advantage if rates drop before your permanent mortgage closes. This protects you from rising interest rates while still giving you the opportunity to benefit from market improvements.