Construction Mortgage

A typical mortgage involves borrowing money to buy a previously existing home. The home is there. Someone is moving out. You borrow money from the bank to buy the house. The house becomes the collateral for the loan.

Construction loans work in a similar way, except the home isn't built yet. You borrow money to build the house. Usually, once construction is completed, you change the construction mortgage into a conventional mortgage. Either the loan itself is structured to become a conventional mortgage once the house is built...or you get a separate mortgage and use that money to pay off the construction loan (much like refinancing a mortgage).