What is an End Loan?

Malcolm Tatum

An end loan is a type of loan that is used to settle the balance remaining in any type of short-term construction loan. With many forms of construction loans, payment of the principal is delayed until the construction is completed. With an end loan, there is also the possibility of continuing to only make interest payments for a period of time after the construction is complete, although the loan will begin to amortize.

Man climbing a rope
Man climbing a rope

A very common model is to make use of a single lender to create a construction loan that is coupled with an end loan. During the actual construction period, the debtor is required to make interest payments to the lender. Once the construction is completed, the debtor becomes responsible for making payments that cover both the interest and the principal. At that point, the debtor chooses to roll the remaining balance due on the construction loan into a new debt instrument, the end loan.

There are a couple of potential advantages to this type of arrangement. With an end loan, it may be possible to extend the benefit of only paying on the interest for a while longer, possibly anywhere between a year to five years. This benefit can be especially important if the construction involved was for a commercial building, and the owner requires additional time to lease out each unit within the edifice. Since only interest payments are needed during those first months of years of operation, the owner has time to fill the space to capacity and create a revenue stream that can easily be used to pay off the end loan according to terms.

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Another benefit to an end loan is that the interest rate may be slightly better than the rate on the original construction loan. This is especially true if the property has appreciated in value as a result of the construction, and the working relationship between the debtor and lender has proven satisfactory for both parties. Since the debtor would always be free to seek a new loan elsewhere to retire the construction loan, the lender may extend the more attractive interest rate as a means of retaining the debtor’s business.

Along with benefits, there are also some potential drawbacks to an end loan. Since the loan balance begins to amortize immediately, choosing to only make interest payments for a period of time will mean that the overall amount repaid over the life of the loan will be higher. In addition, going with a combination of a construction and end mortgage at the onset may seem to save money at first, but if interest rates shift during the construction period, the rate on the end loan may not be as attractive as it was in times past. For this reason, builders sometimes prefer to commit only to a construction loan and revisit the issue of an end mortgage loan with the lender when the construction is almost completed, while also taking the time to compare those rates with the offerings of other lenders.

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