When do you have to pay interest during construction projects?
When is Interest Paid in Development/Construction?
During construction projects, borrowers typically pay interest on construction loans either through interest-only payments on the drawn amount during the construction phase or by capitalizing interest, which is added to the loan balance. In some arrangements, interest payments are deferred until construction completion, at which point they may be due as a lump sum or included in mortgage payments if the loan converts. The specific terms of interest payments vary based on the loan agreement and the lender's policies.
How interest payments are handled can vary:
- Interest-Only Payments: Borrowers often make interest-only payments on the drawn portion of the loan during the construction period. This means as more of the loan is drawn down to fund the construction, the interest payments increase.
- Capitalized Interest: In some cases, interest may be capitalized, meaning it's added to the balance of the loan during the construction period. The borrower doesn't make cash payments during construction, but the total loan amount increases.
- End of Construction: If interest is not paid during construction, it's typically due when the project is completed, either as a lump sum or as part of the new mortgage payments when the construction loan is converted to a traditional mortgage.
The specifics of interest payments will depend on the loan agreement and the lender's policies, so it's essential to review and understand these terms before entering into a construction loan.