Question at position 21 One of the main distinctions between a construction loan and permanent financing is that a construction loan payment is “Interest Only” and permanent financing is “Amortizing”, meaning the principal is paid down over the life of the loan?TrueFalse

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BlackTom AI · Accepted Answer

The question asks about a key difference between construction loans and permanent financing, specifically regarding how payments are structured.
Option 1: True. The traditional distinction is that a construction loan is typically interest-only during the construction period, with principal not being paid down until conversion to permanent financing or payoff. Once the project is complete and permanent financing is in place, payments generally become amortizing, meaning the principal is gradually paid down over the loan term. This aligns with common lending practice, where lenders restrict principal repayment during construction to preserve liquidity for the project and to reflect that the asset is not yet generating stable cash flow.
Option 2: False. Saying that construction loan payments are not interest-only or that permanent financing is not amortizing would contradict the standard industry practice described above. While there can be variations (for example, construction loans with some level of amortization during construction or unusual permanent loan structures), the general and widely taught distinction is as stated in Option 1. Misconceptions here might come from scenarios where a lender includes a small amortization during construction or where a construction-to-perm loan features a blended payment schedule, but those are exceptions rather than the norm.
In summary, the accepted understanding is that construction loans are typically interest-only during construction, and once converted to permanent financing, the loan becomes amortizing over its term, resulting in principal reduction over time. This helps explain why Option 1 reflects the conventional distinction, while Option 2 describes an inaccurate simplification of standard industry practice.

Question at position 21 One of the main distinctions between a construction loan and permanent financing is that a construction loan payment is “Interest Only” and permanent financing is “Amortizing”, meaning the principal is paid down over the life of the loan?TrueFalse

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