If you’re planning to buy land in the U.S., you’ll likely come across two financing options: land loans and construction loans. They sound similar, but they serve very different purposes. Choosing the right one depends on whether you want to buy land now and build later, or if you’re ready to start construction immediately.
What Is a Land Loan?
A land loan is financing used solely to purchase land. It doesn’t cover building costs. Borrowers often use land loans when they want to secure a parcel today but aren’t ready to start building.
For example, you can estimate monthly payments using a land loan calculator before applying, which helps you compare costs with other loan options.
Key features of land loans:
- Loan terms: usually 5–15 years
- Down payment: 15–30% or more
- Interest rates: higher than a traditional mortgage
- Approval: based on land appraisal, zoning, and borrower credit
Best for: buyers who want to purchase land now and build later.
What Is a Construction Loan?
A construction loan finances both the land and the building process. Funds are typically disbursed in stages as construction progresses. After the project is complete, the loan often converts into a long-term mortgage.
If you already own land, you might explore a construction loan calculator with land equity to see how using your property as collateral impacts payments.
Key features of construction loans:
- Loan terms: short-term during build, then converts to mortgage
- Down payment: usually 20–25% (can be lower with USDA or VA programs)
- Interest rates: higher during construction, standard mortgage rates after conversion
- Requirements: building plans, contractor agreements, budget, timeline
Best for: buyers who are ready to build a home right away.
Land Loan vs Construction Loan: Side-by-Side Comparison
| Feature | Land Loan | Construction Loan |
|---|---|---|
| Purpose | Buy land only | Buy land + fund construction |
| Timing | Build later | Start building immediately |
| Loan Term | 5–15 years | Short-term during build → mortgage |
| Down Payment | 15–30% | 20–25% (lower with USDA/VA) |
| Interest Rates | Higher than mortgage rates | High during build, lower after conversion |
| Approval Factors | Land appraisal, borrower’s credit | Plans, budget, contractor, borrower credit |
| Best For | Holding land until ready to build | Buyers with immediate construction plans |
Real-World Scenarios
- Scenario 1: Buy Land Now, Build Later
You purchase a $60,000 rural lot with a land loan, putting 25% down. In two years, once your savings grow, you refinance into a construction loan to start building. - Scenario 2: Build Immediately
You find land and a builder at the same time. A one-time close construction loan covers both the land purchase and the construction process, then rolls into a 30-year mortgage.
Pros and Cons of Each
Land Loan
✅ Secure land now
✅ Flexible timeline
❌ Higher interest rates
❌ Separate financing needed for construction
Construction Loan
✅ Covers land + building costs in one loan
✅ Converts into a mortgage after completion
❌ Requires detailed plans and approvals upfront
❌ Payments can be higher during the build phase
FAQs
1. What’s the main difference between a land loan and a construction loan?
A land loan only finances land, while a construction loan covers both land and building costs.
2. Can I roll a land loan into a construction loan later?
Yes, many lenders allow refinancing from a land loan into a construction loan once you’re ready to build.
3. Which loan has lower interest rates?
Construction loans usually shift into standard mortgage rates after building, while land loans keep higher rates.
4. What is a one-time close construction loan?
It combines land purchase, construction funding, and long-term mortgage into one closing process.
5. When should I choose a land loan over a construction loan?
If you want to buy land now and wait before building, a land loan is the right choice.
Final Takeaway
The choice between a land loan and a construction loan depends on your timeline. If you’re buying land as an investment or to build on later, a land loan makes sense. If you have plans, a contractor, and want to start construction right away, a construction loan is the smarter option.
Tracey is the creator of LandLoansCalculator.com, a trusted resource for accurate and easy-to-use land loan calculators. With a strong focus on clarity and reliability, Tracey is dedicated to helping users understand land financing with confidence. Her goal is to simplify complex calculations so buyers, investors, and professionals can make informed decisions quickly and efficiently.