A construction loan is essentially short-term financing that covers building costs while the work is being done; the borrower generally pays only interest during construction on the amount that has been used at that point, then begins monthly principal and interest payments once the project has been completed.
According to TD Bank, originations for its jumbo construction loans have soared 110 percent since Jan. 1. Boston Private Bank & Trust Co., meanwhile, reports that its jumbo construction loan originations rose 35 percent in the San Francisco Bay area alone in the first eight months of the year versus the same stretch of 2012. The bank has since introduced construction lending in Southern California.
Lenders report that the increase in the lending niche is partly because of limited housing inventory in various markets. The product is not without its drawbacks, however, including additional fees; higher borrowing costs, often with an adjustable-rate structure; and larger down payments when appraisals come in lower than the cost of building a home in the borrower's market because other local homes typically are not as nice.
Source: "Construction Loans for Your Dream Home," Wall Street Journal (10/04/13)
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