What type of mortgage is typically used to finance a construction project?

A construction mortgage is specifically designed for financing construction projects. Unlike traditional mortgages, which are typically used for purchasing existing homes, a construction mortgage provides funds in stages or draws, aligning with the various phases of the construction process. This structure allows the borrower to access funds as needed, ensuring they have the necessary cash flow to pay contractors and suppliers as the project progresses.

These loans usually come with higher interest rates due to the increased risk associated with construction investments, which can include factors such as project delays or cost overruns. Additionally, construction mortgages typically require a detailed plan and budget for the building project, as lenders need to assess the risk and feasibility before approving the loan.

In contrast, fixed-rate mortgages are generally used for established homes and provide a stable interest rate over the term of the mortgage, while adjustable-rate mortgages fluctuate with the market and are more common for home purchases or refinances rather than for financing construction. Equity mortgages tap into the existing equity of a property, which also does not apply in the context of financing new construction. Therefore, the construction mortgage is the most suitable option for such projects.