Construction Loan

Short-term real estate loan to finance building costs. The funds are disbursed as needed or in accordance with a prearranged plan, and the money is repaid on completion of the project, usually from the proceeds of a mortgage loan. The rate is normally higher than prime, and there is usually an origination fee. The effective yield on these loans tends to be high, and the lender has a security interest in the real property.

One that finances Subdivision costs and/or improvements to real estate. See Building Loan Agreements.Example: Collins plans to develop an office building. She receives a Commitment for permanent financing and approaches a Commercial Bank for a construction loan. The bank agrees to Advance money as construction progresses.

A loan to a builder for a short term, financing construction prior to permanent financing.