Construction Loan Calculator

A construction loan calculator shows two very different payments: the small interest-only bills while the house is being built, and the full mortgage payment afterwards. On a $400,000 project with 20% down, the $320,000 loan drawn evenly over 12 months at 8% costs $13,866.67 in construction interest, starting at $177.78 in month 1 and ending at $2,133.33 in month 12.

Three neighboring tools answer different questions. The Land Loan Calculator is the right page when you are buying the lot first and building later. The Mortgage Calculator takes over once the loan has converted and you want the full PITI on a finished home. The Amortization Calculator breaks the permanent loan down payment by payment. Use this page for the part none of them model: a balance that grows draw by draw and charges interest only on what has been released.

Phase 1: the construction (draw) period

A construction loan is not funded in one lump sum. The lender approves a maximum amount and then releases it in stages, called draws, as the work is completed and inspected. A typical sequence is site work and foundation, framing, mechanical rough-in, drywall and interior, then final finishes and the certificate of occupancy. Because you are only charged for money that has actually left the lender, your bill is small at the beginning and large at the end. Nothing is repaid during this phase: the loan is interest-only, so the balance only moves in one direction, upward, until the last draw.

Phase 2: conversion to the permanent loan

When the house is finished and the final inspection clears, a construction-to-permanent loan converts automatically into a regular amortizing mortgage for the full loan amount, with one closing and one set of closing costs. In a two-close structure the construction loan matures and you take out a separate mortgage to pay it off, which means qualifying a second time, a second appraisal and a second round of closing costs. Either way, the month after conversion your payment stops being interest-only and starts including principal.

The formulas

The interest-only payment in any month is simply the outstanding drawn balance times the monthly rate:

With equal monthly draws the whole construction phase collapses into one closed-form expression, because the balance climbs in a straight line from one draw to N draws:

where L is the construction loan amount, r is the monthly rate and N is the number of build months. The average monthly payment is that total divided by N, which works out to roughly half the interest on the full balance. After conversion, the permanent payment uses the standard amortization formula:

with P the full loan amount, r the monthly permanent rate and n the number of permanent payments.

Worked example: a $400,000 build

You are building a house with a total project cost of $400,000 and bringing $80,000 (20%) of your own equity, leaving a $320,000 construction loan. The builder needs 12 months and draws evenly, $26,666.67 a month, and the construction rate is 8.0%, so the monthly rate is 0.08 ÷ 12 = 0.0066667.

Month 1: only one draw is outstanding, so interest is $26,666.67 × 0.0066667 = $177.78. Month 6: six draws are outstanding, $160,000 × 0.0066667 = $1,066.67. Month 12: the full $320,000 is out, so the payment is $2,133.33. Add them up and the build costs $13,866.67 in interest, an average of $1,155.56 a month. The closed form confirms it: $320,000 × 0.0066667 × 13 ÷ 2 = $13,866.67.

At conversion the $320,000 becomes a 30-year fixed mortgage at 6.5%, and the principal-and-interest payment is $2,022.62 a month, with $408,142 of interest over the full term. Counting both phases, the project costs $422,009 in interest. Notice that the last interest-only payment of $2,133.33 is actually higher than the first permanent payment of $2,022.62, because 8% interest-only on the whole balance costs more than 6.5% amortized. The month-to-month shock is not at conversion, it is spread across the build.

Month-by-month draw schedule for the example

Every figure below comes from the $320,000 / 12 months / 8% example with equal draws:

The pattern is the whole point of the product: the last payment is twelve times the first, and the total is only about half of what a fully drawn loan would have cost for the same year.

Construction interest per $100,000 borrowed

To scale to any loan size, use the per-$100,000 figures below, all computed with equal monthly draws. Multiply by your loan amount divided by 100,000: a $450,000 loan over a 12-month build at 8% costs 4.5 × $4,333, about $19,500.

Two things stand out. Doubling the build from 6 to 12 months roughly doubles the interest, and a one-point difference in the rate moves the bill by about an eighth. Time on the loan is the bigger lever.

Draw pattern matters more than most people expect

Lenders release money against completed work, so the shape of the schedule follows the shape of the job. A build that pours an expensive foundation and frames early front-loads the balance; a build where most of the money sits in cabinetry, flooring and fixtures back-loads it. Same house, same rate, very different interest bills. On the $320,000 / 12-month / 8% example:

• Even draws (a flat $26,667 a month): $13,866.67 in construction interest.
• Front-loaded (draws shrink from $49,231 down to $4,103): $17,777.78, or $3,911 more.
• Back-loaded (draws grow from $4,103 up to $49,231): $9,955.56, or $3,911 less.

The spread between the two extremes is $7,822 on a single build. Switch the draw schedule in the calculator to see the effect on your own numbers, and ask your builder for the actual draw request schedule rather than assuming an even split.

Permanent payment on the $320,000 loan

Once the loan converts, the payment depends on the permanent rate and term you lock. All figures are principal and interest only, computed with the amortization formula:

The permanent phase dwarfs the construction phase: $13,867 of build interest against $408,142 over 30 years at 6.5%. The construction loan is the noisy part, but the rate you convert into is where the real money is.

Second worked example: the land funded at closing

Now suppose the total project cost is $250,000, you put down $50,000 (20%), and the $200,000 loan includes $40,000 released on day one to buy the lot. The remaining $160,000 is drawn evenly across a 9-month build at 9%, so each draw is $17,777.78 and the monthly rate is 0.0075.

Month 1 already carries the lot plus the first draw: $57,777.78 × 0.0075 = $433.33. Month 9 carries the whole $200,000, so the payment is $1,500.00. Total construction interest is $8,700.00, an average of $966.67 a month. Convert at 6.75% over 30 years and the permanent payment is $1,297.20, with $266,991 of interest over the term.

The lot draw is the expensive part. Money released at closing sits on the books for every single month of the build. Adding an $80,000 land draw to the first example pushes construction interest from $13,866.67 to $16,800.00, an extra $2,933.33 for the same house. If you already own the lot free and clear, that equity often counts toward your down payment and you skip the charge entirely.

How to use this calculator

1. Total project cost: enter land plus the builder's contract price plus site work, permits and a contingency. Lenders underwrite the whole project, not just the house.
2. Down payment / equity: type the cash you are bringing, or tap 10%, 20% or 25%. Land you already own usually counts here.
3. Construction period: pick 6, 9, 12 or 18 months, or type a custom number in the optional panel. Add a cushion; overruns are common.
4. Construction rate: use the quote from your lender. Construction rates are frequently variable, so run a higher rate as a stress test.
5. Draw schedule: choose even, front-loaded or back-loaded to match your builder's actual draw requests.
6. Land draw and permanent terms: open the optional panel to fund the lot at closing and to set the permanent rate and term.

The results update instantly. Read the average interest-only payment at the top, check the month-by-month table for the peak payment you have to survive, and compare it with the permanent payment you will carry for the next 15 to 30 years.

Who this calculator is for

• Owner-builders and custom home buyers pricing a single-close construction-to-permanent loan.
• Buyers who already own a lot and want to see how much their equity saves in draw interest.
• Households still paying rent or an existing mortgage who need to know the double-carry cost month by month.
• Renovators using a draw-based rehab loan, where the same interest-only math applies.
• Anyone comparing lenders whose quotes differ on the rate, the build window or the draw fees.

Key terms

• Draw: a scheduled release of loan funds after an inspector verifies a completed stage of work.
• Interest-only period: the build phase, when payments cover interest on the drawn balance and no principal is repaid.
• Interest reserve: borrowed money set aside inside the loan to pay the monthly interest so you do not write a check during construction.
• Single-close / one-time-close: a construction-to-permanent loan that converts to a mortgage with one closing and one set of costs.
• Two-close: a standalone construction loan paid off later by a separate mortgage, requiring a second approval and second closing costs.
• Retainage: a percentage of each draw the lender holds back until the work is fully complete and lien-free.
• Certificate of occupancy: the local approval that the home is habitable, usually a condition of conversion.
• Contingency: a budget cushion, often a set percentage of the contract, held for change orders and overruns.

What changes the result the most

• Build length: the strongest lever on construction interest. Each extra month adds a payment at or near the full balance.
• Draw timing: worth thousands on the same loan, as the front-loaded versus back-loaded comparison above shows.
• Land funded at closing: outstanding for the whole build, so it costs far more per dollar than a late draw.
• Construction rate: often variable and typically above the permanent rate, so a rate move mid-build changes every remaining payment.
• Down payment: more equity means a smaller loan, smaller draws and proportionally less interest in both phases.
• Permanent rate and term: the dominant number for lifetime cost, worth hundreds of thousands over 30 years.

Ways to cut the interest bill

• Shorten the build. Ordering long-lead items early and finalizing selections before framing keeps the schedule from slipping into extra months at the peak payment.
• Push draws later where you can. If a stage can be inspected and funded next month instead of this month, the balance carries the charge for one month less.
• Bring the lot as equity instead of financing it at closing, so no dollar sits on the loan for the entire build.
• Pay interest out of pocket rather than using an interest reserve, so the interest does not get folded into a balance you then amortize for 30 years.
• Compare single-close and two-close offers on total closing costs, not only on the rate. One closing usually beats two.
• Ask about the rate structure. A variable construction rate can move while you build; a lock or a cap changes your risk more than a tenth of a point on the headline rate.

Limitations and assumptions

• Draws are assumed to be released at the start of each month and interest is charged on the full month. Real lenders often compute interest daily on the exact draw dates, so your actual bill will differ slightly.
• The construction rate is treated as fixed for the whole build. Many construction loans float against an index.
• Closing costs, draw and inspection fees, appraisal, title and permits are excluded, as are contingency reserves and change orders.
• The permanent loan shows principal and interest only, without property tax, homeowners insurance, HOA or mortgage insurance.
• It assumes the project finishes and converts as planned; it does not model an extension, a cost overrun or a failed conversion.
• Approval depends on the appraised value of the finished home, your credit, income and debt ratios, and the builder's qualifications. This is a planning estimate, not a loan offer.

How it compares to related calculators

• Buying the lot now and building later: Land Loan Calculator.
• The finished home's full monthly cost with taxes and insurance: Mortgage Calculator.
• Payment-by-payment detail on the permanent loan: Amortization Calculator.
• Cash needed at the closing table: Closing Cost Calculator and Down Payment Calculator.
• How big a project your income supports: Home Affordability Calculator.
• The equity ratio lenders check at conversion: Loan to Value Calculator.
• Financing a renovation on an existing home instead: Home Equity Loan Calculator or the HELOC Calculator.
• Retiring the permanent loan faster once you move in: Mortgage Payoff Calculator.

Sources

• Consumer Financial Protection Bureau (CFPB) - Owning a Home: mortgage basics, loan options and the closing process.
• Consumer Financial Protection Bureau (CFPB) - Ask CFPB: answers on mortgage terms, interest-only loans and closing costs.
• Financial math (interest on a drawn balance, standard amortization) is deterministic and needs no external source.