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Lot loan VS Construction / Builder's Loan

Regular Contributor

Lot loan VS Construction / Builder's Loan

I am seeking advice: 
 
I don't know much about the ins and outs of loans.  I recently went under contract for a lot with intent to build (soon - hopefully). The lender (Capital One) that the broker referred me to is offering a 3 year fixed loan @ 8.5% (if you qualify) no matter how high your FICO / Beacon score is - The thing about this loan is the payment that they require is "interest only" for the 3 years.  They also offer a 7 year lot loan with the same interest rates but, the payments are higher b/c they require payments on the principle too. 
 
I can't seem to make sense of why I would want to do an interest only loan for 3 years and not just get the builder's loan (b/c at the end of the 3 years I'll still owe the entire amt. for the lot).  My main reason for thinking of the lot loan is wanting more house (thinking the income to debt ratio would allow me to get more house when the loan is paid down some) with hopes of paying the lot down some within a year or so and then adding the house in after which frees up some of that money to allow me to have more free for financing the house. 
 
Even in typing this, the lot loan makes no sense to me but this is what most people in the area has done.
 
1) I hope I haven't been too confusing.
 
2) Can anyone make sense of this or make me understand why people are going with the lot loan only?
 
3) Does anyone know about loans and issues as such to explain the difference?
 
(I am doing this by myself and feel I'll make the wrong decision and/ or be taken advantage of with this)
 
Thanking you in advance
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