What does a construction loan typically consist of?

A construction loan is specifically designed to cover the costs associated with building a new property. This type of loan is typically different from a traditional mortgage as it finances the construction phase and has distinct characteristics tailored to the needs of builders and developers.

The correct answer highlights that a construction loan generally requires interest-only payments during the construction period, which means the borrower pays only the interest on the amount drawn rather than the principal. As construction progresses, funds are disbursed in draws, which means the loan might not provide all the capital upfront but releases it in stages correlating to the completion of specific phases of the project. This makes it a temporary financing solution intended to be replaced by a long-term loan once construction is complete, transitioning the borrower into a permanent mortgage that includes amortization.

The other options present characteristics that do not typically align with the nature of construction loans. For instance, a loan with fixed monthly payments or a long-term financing structure with amortization would more accurately describe conventional loans rather than construction loans which are structured to adapt to the unique financial needs during the building process. Similarly, a conventional mortgage with a balloon payment suggests a different type of loan altogether, often involving a large payment at the end of the term rather than the incremental draw payments