A construction loan is classified as what type of loan?

A construction loan is classified as a nonamortized loan because it is structured in a way that does not require regular principal and interest payments throughout its term. Instead, the borrower typically only pays interest on the funds that have been drawn down, which are used to finance the ongoing construction of a property. This allows for more flexibility during the construction phase, as funds can be accessed as needed, and the borrower can manage cash flow more effectively while the project is in progress.

At the completion of the construction, the loan is often converted into a permanent mortgage or is paid off with a final payment, which is generally much larger than the previous payments made during the construction period. Nonamortized loans like this are designed specifically to accommodate the unique cash flow requirements of construction projects, differentiating them from amortized loans that involve equal payments over a specified period and from other types of loans that do not fit this structure.