A construction loan is used to finance construction. It is a short-term loan designed to be replaced with permanent financing as soon as the construction is completed or the property sold, depending on the terms of the loan. Usually, construction loans are not made for longer than two years and have a higher interest rate than a traditional loan. Some, but not all, construction loans convert to permanent financing at a lower interest rate once the construction is completed. Others are required to be paid in full at the end of an initial term.
A loan that replaces a short-term construction loan is known as a take-out loan. It is known by this name because it takes out and replaces the existing construction loan.
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