End Loan: What it Means, How it Works, How it's Used

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Updated January 20, 2021

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What Is an End Loan?

An end loan is a specific type of long-term loan an individual procures to pay off a short-term construction loan or other interim financing structure. Such short-term loans are used by builders as start-up financing to launch the construction of homes or other real estate properties.

Key Takeaways

End loans are long-term loans used to pay off a short-term construction loan or another form of interim financing.
The short-term loans, which are often procured by individuals looking to custom build their own houses, tend to carry high interest rates.
After construction products are complete and builders refinance their short-term loans with end loans, the interest rates typically drop precipitously.
Construction loans and end loans are often co-packaged by a single lending source, which can simplify the credit application process.

How an End Loan Works

Although end loans may have interest-only features that delay the repayment of principal, at some point, they begin to amortize. This differs from construction loans or other forms of interim financing, which are typically interest-only vehicles that require full repayment of principal and accrued interest, only upon disbursement of funds from the end loan.

An end loan might be part of a combination of construction or end loan, which allows a borrower to deal with just one lender. This can simplify paperwork because a borrower need only file a single credit application.

Furthermore, the borrower generally must pay only one set of loan settlement costs. But there are also disadvantages to dealing with a single lender. The biggest downside to this form of one-stop shopping is that borrowers cannot hunt for the best deal after the interim construction financing runs its course. Although this package deal may feature favorable terms for one of the loans, it seldom presents low rates for both.

Lenders consider construction loans to be riskier than traditional mortgages because borrowers are more likely to default—thanks to the high interest rates.

How Borrowers Use End Loans

End loans help construction loan borrowers pay off their entire original balance, upon the completion of a project. This is a welcome relief because the construction loan often carries high interest rates.

Construction loans also tend to carry their own sets of thorny stipulations. For example, they may require the borrower to pay off the entire balance before a given project’s completion date, or they may obligate the borrower to designate a certain percentage of his or her payments towards interest.

Construction loans are often taken out by builders or home buyers looking to custom-build their own homes. Once construction wraps up, the borrower may then refinance the loan. Borrowers are typically attracted to this financing model because the refinanced loan relieves them of the invariably high interest rates associated with construction loans. By using an end loan to pay off the construction loan, the borrower saves money, based upon the difference in interest rates.

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