Construction loans are used to finance the building of a new home rather than purchase an existing home. They are usually variable-rate loans that have interest only payments during the construction phase. Draws are scheduled based on the stages of construction to pay the builders.

Construction loans are not intended to replace your mortgage over the long term. Permanent financing is available upon completion of construction, replacing the construction loan and allowing you to obtain a fixed rate, adjustable rate, or even option arm or negative amortization mortgage.