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What is the difference between a mortgage and construction loan?

Apr 17, 2008
When money is lent to a person or organization, it is said to be a loan; once complete it becomes a legally binding contract. The true definition would include, services, products or people (like staff) but for the purposes of this piece it is financial arrangements we are concerned with. The period a loan will run generally depends on the financial circumstances of the borrower but normally the longer this period, the more it will cost; when payments are made can vary, but they are normally at the same time each month.

This service is generally provided at a cost, referred to as interest on the debt and it can vary how this is repaid. Although not seen as much these days one type of financial agreement ensures that the first payments made to clear the debt are in fact just the charges on the sum owed. For most people repaying a debt, they know that each month, part of the debt is being paid off along with a small amount of interest that has been added to it.

Whilst financial establishments can play many roles, this is the most frequent way in which they are used. For both companies and individuals, arranging a loan is a way to increase their cash flow for a regular monthly outlay. this is the simplest and most reliable means to raise finance.

A mortgage is a very common type of debt and the primary method used by individuals to purchase a house however with this type, the money advance can only be used for the purpose for which it was intended. Debts of this nature are of course much larger than the standard and the lending company requires some security from the borrower; the standard method is by retention of the title to the property until the debt is paid back in full. With this type of loan, should the borrower fail to make payments on the loan or default, then the bank or other financial institution has the right to sell the property; although selling the property is one option, keeping it as an investment is another. A construction loan is nothing more then a regular mortgage loan with a 12 month construction period added at the beginning of the mortgage period.

Even small loans can be secured but this generally only happens when a person has a poor credit history which could be the case of a person buying a car; in this instance, the car becomes it's own security for the debt. Car loans are generally much shorter as the useful life of a car is correspondingly reduced; it is rare for the period to exceed five years.

Financial companies organize unsecured loans everyday although many people do not even realize that is what they are being provided with; this can include the credit card, personal arrangements, bank overdrafts and other forms of credit. Although it is difficult to provide any interest rates as they will differ greatly from one bank to the next, if you want to lose the highest interest rate unsecured debt you have: cut up those store cards.

Financial companies can be caught out too when they provide cash to a person so they can gain advantage over his or her situation; also known as predatory lending. Credit card companies in many countries are often accused of a similar practice where they lend money at very high interest rates and make money out of frivolous extra charges. You would be wise to be wary of financial arrangements that seem to good to be true because they probably are.
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