What is Construction Loan?
A construction loan (also known as a “self-build loan") is a short-term loan used to finance the building of a home or another real estate project. The builder or home buyer takes out a construction loan to cover the costs of the project before obtaining long-term funding. Because they are considered relatively risky, construction loans usually have higher interest rates than traditional mortgage loans.
Home Loan Vs Construction Loan
Tenure of a construction loan is shorter
The tenure period of a home construction loan is much shorter that a regular home loan, resulting in higher EMIs. This is so because the lender is at a greater risk to provide funding for a house that does not yet exist.
The home construction loan amount is disbursed in phases
Unlike a regular home loan amount, which is disbursed in its entirety to the borrower, a home construction loan is paid out in phases. The lender keeps an eye on the construction and pays for the next phase only after the previous construction phase is complete.
A construction loan has a larger down payment
Where a regular home loan has a down payment of 15% to 20%, the down payment of a home construction loan can be 25% and above.
Generally, interest rates for home construction loans are higher at about 11 to 14 percent, as opposed to 8 to 10 percent for regular home loans. You can easily find out these details by using a home loan calculator available on various websites.