What type of loan is characterized by draw payments and interest-only payments during the construction period?

What type of loan is characterized by draw payments and interest-only payments during the construction period?

• A. Permanent Loan
• B. Construction Loan
• C. Equity Loan
• D. Short-Term Loan

Answer: (B)

A loan characterized by draw payments and interest-only payments during the construction period is known as a construction loan. This type of loan is specifically designed to provide financing for the building or renovation of a property. During the construction phase, the borrower is allowed to withdraw funds as needed for various construction expenses, which is referred to as draw payments. As these funds are drawn, the borrower typically only pays interest on the amount that has been disbursed, making it more affordable during the costly building or renovation process. This interest-only payment structure means that the borrower does not start paying down the principal until the construction is complete and the loan transitions into a permanent financing phase, often referred to as a permanent mortgage. Permanent loans, in contrast, are structured for long-term financing after the construction is completed and generally involve both principal and interest payments. Equity loans typically relate to borrowing against existing equity in a property, and short-term loans may cover various purposes but do not specifically pertain to the construction financing model characterized by draw and interest-only payments.

A loan characterized by draw payments and interest-only payments during the construction period is known as a construction loan. This type of loan is specifically designed to provide financing for the building or renovation of a property.

During the construction phase, the borrower is allowed to withdraw funds as needed for various construction expenses, which is referred to as draw payments. As these funds are drawn, the borrower typically only pays interest on the amount that has been disbursed, making it more affordable during the costly building or renovation process. This interest-only payment structure means that the borrower does not start paying down the principal until the construction is complete and the loan transitions into a permanent financing phase, often referred to as a permanent mortgage.

Permanent loans, in contrast, are structured for long-term financing after the construction is completed and generally involve both principal and interest payments. Equity loans typically relate to borrowing against existing equity in a property, and short-term loans may cover various purposes but do not specifically pertain to the construction financing model characterized by draw and interest-only payments.