A line of credit and a construction loan are both loan types offered by financial institutions. A line of credit is an open line borrowers take from for various purposes, while a construction loan is used for building purposes.
Line of Credit
A line of credit is a loan established between a customer and a bank with a maximum limit the customer can use. The customer draws money from the credit line at any time up to the limit. The customer then pays the money back and draws again when needed.
Line of Credit Features
A line of credit usually has a specified time period when the line of credit ceases to exist. It also has a due date. The proceeds from a line of credit are used for whatever purpose the customer desires.
Construction Loan
A construction loan is a short-term loan used for building purposes. Customers are approved for a maximum amount and take draws as needed. Some construction loans allow unlimited amount of draws, others allow only a specified number of draws.
Costruction Loan Features
Interest rates on construction loans are typically higher than those of regular home loans because they are temporary. The loan is temporary because when the project is done, this loan is paid off by the customer getting a permanent home loan.
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