re: Can someone help me understand how construction loans work?

I've done this a couple times. If you own the lot you are only going to be making interest payments on the loan. They will disburse money in phases as the construction goes along, so interest payments won't be much at first. I believe its 4-6 phases depending on the contractor. After slab, framing, rough in, etc they will send you a lump sum to pay contractor. Since you own the lot, they will loan you 85% of the appraised finished product, depending on land value and cost of construction of course. So if land is worth 100k and construction is 300k you will get a loan for 340k, which means no out of pocket. Hope this helps