How do construction loans differ from permanent financing in terms of interest accrual and funding?

• A. Construction loans accrue interest on the full loan amount from day one
• B. Permanent financing is always interest-only
• C. Construction loans may be interest-only during build with phased draws; interest accrues on drawn funds; permanent financing starts after completion with amortization
• D. Permanent financing requires no interest payments

Answer: (C)

The key idea is how funding and interest flow differ between building a project and owning it as a long-term asset. During construction, funds are released in draws as work progresses and inspections verify milestones. Because you’re not borrowing the entire amount upfront, interest is typically charged only on the actually drawn funds, and many construction loans are structured as interest-only for the build period. This keeps the monthly payments lower while the project is being completed, and the loan term is usually short (around one to three years).

Once construction finishes and the project is ready to operate, the loan often switches to a permanent, longer-term financing arrangement. That take-out loan is usually amortizing, meaning payments include both interest and principal over a longer period, and the full loan amount is treated as the outstanding balance for repayment.

So, the best description is that construction loans may be interest-only during build with phased draws, interest accrues on the drawn funds, and permanent financing starts after completion with amortization. This captures the phased funding, the interest-on-drawn-amount concept, and the shift to amortization once the project is stabilized.

For completeness: the idea that construction loans accrue interest on the full loan amount from day one is not typical because funds aren’t all drawn initially; permanent financing is not always interest-only, and permanent financing does have interest payments, not zero interest.