Usual Arrangements
Funds are taken from the loan through a process referred to as a "draw". A draw is the method by which funds are taken from the construction budget to pay material suppliers and contractors. Each lender has different requirements for processing a draw. For example, some allow the borrower to request draws online, while others require paperwork and periodic inspections. This process helps ensure that the loan proceeds are actually used for the construction and that the construction process is moving smoothly. The borrower is only charged interest on the amount borrowed at any one point.
Instead of paying each month during construction, almost all construction loans in the United States have extra funds borrowed right away and stored in a locked account known as an "interest reserve". Each month the monthly payments are taken from the account so that the borrower does not have to start paying out of pocket until the project is completed.
In Australia, progress draws are interest only to minimise the outgoings for the borrower. Once the construction has been completed the loan reverts to the requested payment option the borrower selected at underwriting (either interest only or principal and interest).
Read more about this topic: Construction Loan
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