When it comes to financing a construction project, a construction loan is often the go-to option for many individuals and businesses.
But, before you apply for a construction loan, it’s essential to understand the terms and conditions of the loan, including whether or not you can pay both principal and interest on the loan.
What is a construction loan?
Construction loans are typically short-term loans used to finance the construction of a new or existing building.
Construction loans include a draw schedule based on project progress, unlike standard mortgage loans. As work progresses, the borrower will receive payments.
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Can you pay principal and interest on a construction loan?
The short answer is yes; you can pay principal and interest on a construction loan. Construction loan payments differ from home loan payments.
The borrower usually only pays interest on drawn-down funds during construction. The borrower will only owe the total amount once the construction project is finished since the loan balance is increasing.
After construction, the loan becomes a mortgage. The borrower starts paying principal and interest at this stage. Some lenders provide construction-to-permanent loans, which combine the construction loan with the permanent mortgage loan.
The borrower only pays the interest during construction, and the financing immediately converts to a mortgage loan once the construction is complete.
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Benefits of paying principal and interest on a construction loan
Paying principal and interest on a construction loan during construction offers several advantages. Its main benefit is lowering the overall cost of the loan.
Paying down the principal during construction reduces the loan’s interest. The lesser the loan sum, the cheaper the interest.
Paying principal and interest throughout construction helps build equity. This is especially helpful if you want to sell the property soon after development.
Construction loans allow principal and interest payments, although the structure differs from mortgage loans. You’ll only pay interest on drawn-down funds during construction.
After construction, the loan usually becomes a mortgage, and you’ll start paying principal and interest. Paying both principal and interest throughout construction reduces the loan cost and builds equity in the home.
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