Construction Loans and End Loans
Ask the Real Estate Lawyer: Real Estate Law Q&A
REM #LAW 734
By Ilyce R. Glink and Samuel J. Tamkin
Summary: A ThinkGlink reader currently has
a construction loan and is planning on needing an end loan to finance the completed
building. Ilyce and Sam explain how construction and end loans work and provide
this reader with advice on how to minimize the amount of interest he will pay.
Q: I'm learning about construction to permanent loans. My most immediate question
is why can’t I pay "draws" as they come up before paying interest?
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For instance, if the first draw the builder took was for $50,000, I would want
to pay that in full. Is that possible?
My loan officer can't quite figure out why I would even want to. My reasoning
is simple: I want my converted loan to be as low as possible, and to pay as
little interest as possible.
A: A residential construction loan is used by a homeowner while he or she builds
a home and a commercial construction loan is used by a real estate investor
to build a commercial property. Either of these loans has the lender giving
the borrower a bit of money at a time as the building is put up.
When the home is up and the homeowner moves into it or the commercial building
is up and rented, an end lender – meaning a lender that wants to give
the borrower a permanent loan – will finance the property as it would
any home or commercial building, without dealing with construction issues.
During the construction process, the lender will give you money to continue
with your construction. Each time you need money for the construction you request
a “draw” on the loan.
Once a portion of the loan is paid to you, you have to start paying interest
on the loan. You imply from your question that you have cash in hand to pay
off your construction loan as you make each draw. If that is so, why do you
even have a lender? If you don’t need or want to “borrow”
the money, why didn’t you just pay cash for your construction costs?
Your loan officer is perplexed because on one day he lends you money and you
want to pay it back that same day. To him it doesn’t make sense and we
Either you want to borrow money and proceed with your construction or you have
some or all of the money for the construction in hand. If you have the money
and don’t want to pay interest on the loan, you could start the construction
with your funds and draw down the loan as you need money. That process would
minimize the amount of money you borrow and the length of time for the funds
that you have borrowed.
If you have an end loan amount in mind, you should sit down with your construction
loan officer and talk with him about what these thoughts. The loan officer may
have the authority and ability to readjust the amounts that you draw from the
loan with other funds that you have and you can work to get the building put
If you borrow too little, you can request that the end loan be a little higher.
If you borrow too much, you can request that the end loan be lower and that
you will pay off the construction lender with money you currently have.
Samuel J. Tamkin is a Chicago-based real estate attorney. Ilyce
R. Glink’s latest book is 50 Simple Steps You Can Take To Sell Your
Home Faster and For More Money In Any Market. If you have questions for
them, write: Real Estate Matters Syndicate, PO Box 366, Glencoe, IL 60022
or contact them through Ilyce’s website www.thinkglink.com