Calculate interest-only draw payments during construction and estimate your permanent mortgage payment after completion. Plan your construction budget with confidence.
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Draw Payment (Monthly)
$0.00
Interest-only during construction
Total Draw Period Interest
$0.00
Over full construction term
Permanent Loan Payment
$0.00
Monthly amortized payment
Total Project Cost
$0.00
Project + Land
Down Payment Amount
$0.00
Due at closing
Contingency (10%)
$0.00
Suggested budget reserve
Amortization Summary — Permanent Loan
Loan Amount
$0.00
Permanent loan principal
Monthly Payment
$0.00
Principal + interest
Total Payments
$0.00
Over full loan term
Total Interest
$0.00
Cost of permanent financing
How the Construction Loan Calculator Works
A construction loan is a short-term, interest-only loan used to finance the building of a home or other real estate project. Unlike a traditional mortgage, funds are disbursed in stages (called "draws") as construction progresses. During the building phase, you pay interest only on the amount drawn.
1
Total project cost — Enter the estimated construction cost including materials, labor, permits, and fees. Add the land cost separately if you're purchasing the lot.
2
Down payment — Enter your down payment percentage. Most lenders require 20–30% down for construction loans. The calculator subtracts this from the total project cost to determine the loan amount.
3
Construction period — Set the construction term (6–36 months). During this time, you pay interest-only on the drawn amount at the construction interest rate.
4
Permanent financing — After construction, the loan converts to a permanent mortgage. Enter the permanent loan amount, term, and rate to calculate the fully amortized monthly payment.
5
Review results — See your monthly draw payment, total construction interest, permanent loan payment, and a summary of total project costs including a suggested 10% contingency reserve.
Draw Payment = Loan Amount × (Annual Rate ÷ 12)
Interest-only monthly payment during the construction phase
M = P × [r(1+r)ⁿ] ÷ [(1+r)ⁿ − 1]
Standard amortization formula for the permanent loan payment
Real-World Construction Loan Example
🏠 New Home Construction — $400,000 Project
A family is building a new home with the following details:
Total Project Cost: $400,000
Land Cost: $80,000
Down Payment: 20% ($96,000)
Construction Term: 12 months
Construction Rate: 7.5%
Permanent Loan: $384,000
Permanent Term: 30 years
Permanent Rate: 6.5%
Monthly Draw Payment:$2,400.00 (interest-only during construction)
By planning ahead with a construction-to-permanent loan, this family locks in predictable payments during both the build phase and the long-term mortgage.
🏗️ Custom Home — $600,000 Project
A homeowner building a custom residence with these parameters:
Total Project Cost: $600,000
Land Cost: $120,000
Down Payment: 25% ($180,000)
Construction Term: 18 months
Construction Rate: 8.0%
Permanent Loan: $540,000
Permanent Term: 30 years
Permanent Rate: 7.0%
Monthly Draw Payment:$3,600.00
Total Construction Interest: $64,800.00
Permanent Monthly Payment:$3,592.59
A longer construction timeline and higher rate increase total interest costs, demonstrating the value of efficient project management.
⚡
Free & Instant
Get instant construction loan estimates with no sign-up or fees. Calculate draw payments and permanent financing in seconds.
📅
Draw Schedule Planning
Understand how interest-only payments work during the construction phase. Plan your draw schedule and budget accordingly.
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Construction-to-Permanent
Seamlessly transition from construction financing to a permanent mortgage. See both phases in one comprehensive calculation.
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Amortization Details
View the full amortization summary for your permanent loan, including monthly payment, total interest, and total cost over the loan term.
A construction loan is a short-term, interest-only financing product used to fund the construction of a home, addition, or other real estate project. Unlike a traditional mortgage where you receive the full loan amount upfront, construction loans disburse funds in stages called "draws" as the project reaches specific milestones.
During the construction phase, you pay interest only on the amount that has been drawn (disbursed) to date, not the full loan amount. This keeps your monthly payments lower during the build. Once construction is complete, the loan typically converts to a permanent mortgage — either through a construction-to-permanent loan (single closing) or a standalone construction loan that you refinance into a mortgage.
Key Features of Construction Loans
Interest-Only Payments: During construction, you pay only the accrued interest on drawn funds, keeping payments manageable.
Draw Schedule: Funds are released in stages — typically at foundation, framing, rough-in, drywall, and completion.
Higher Rates: Construction loans carry higher interest rates than traditional mortgages due to the increased risk to lenders.
Larger Down Payment: Most lenders require 20–30% down for construction loans, compared to 3–20% for conventional mortgages.
Shorter Term: Construction loan terms typically range from 6 to 18 months, though some extend to 36 months.
The Draw Process
When you need funds for a construction milestone, your contractor submits a draw request to the lender. The lender inspects the work to verify completion, then disburses the appropriate funds. This protects both you and the lender by ensuring money is only released for completed work. Common draw stages include:
Stage 1 (15–20%): Site preparation, foundation, and slab work
Stage 2 (25–30%): Framing, roofing, and exterior sheathing
Stage 5 (10%): Final completion, punch list, certificate of occupancy
Construction Loan vs Traditional Mortgage
Understanding the differences between a construction loan and a traditional mortgage is essential for anyone planning to build rather than buy an existing home. Here's a detailed comparison:
Feature
Construction Loan
Traditional Mortgage
Funds Disbursement
In stages (draws) as work progresses
Full amount at closing
Payment Structure
Interest-only during construction
Fully amortized principal + interest
Interest Rate
Higher (prime + 1–3%)
Lower (market rate)
Loan Term
6–36 months (short-term)
15–30 years (long-term)
Down Payment
20–30% typically required
3–20% (FHA as low as 3.5%)
Closing Costs
Higher (single closing if CTP)
Standard (2–5% of loan)
If you're building a new home, a construction-to-permanent (CTP) loan combines both phases into a single loan with one closing, saving you money on closing costs and locking in your permanent rate. Standalone construction loans require two closings — one for construction and another for the permanent mortgage — which means two sets of fees and exposure to rate changes at conversion time.
Tips for Managing Your Construction Budget
Building a home is one of the largest financial undertakings you'll ever make. Proper budgeting and contingency planning are essential to avoid cost overruns and financing gaps. Here are practical tips for managing your construction budget effectively:
📋 Include a 10–20% Contingency
Always budget for unexpected costs. Material price increases, labor shortages, and unforeseen site conditions (like poor soil or hidden utility lines) can add 10–20% to your project cost. Our calculator includes a 10% contingency suggestion as a starting point.
📐 Get Multiple Bids
Obtain at least 3–4 detailed bids from licensed contractors. Compare not just the total price but the scope of work, materials specified, and timeline. A low bid may miss important line items that become change orders later.
📏 Plan for Interest Rate Fluctuations
Construction loan rates are typically variable and tied to the prime rate. If your project takes longer than expected, or if rates rise during construction, your interest costs could increase. Consider locking in your permanent rate early with a construction-to-permanent loan.
📊 Monitor Draw Requests Closely
Review each draw request carefully before approving. Verify that the work described is actually complete and matches the schedule. Many lenders require inspections before releasing funds, but you should also keep your own records of progress and payments.
💡 Keep a Cash Reserve
In addition to your contingency fund, maintain a separate cash reserve for cost overruns that exceed the contingency. Lenders may not approve additional draws if the project exceeds the original budget, so having personal funds available can prevent construction delays.
Frequently Asked Questions
What is a construction loan?
A construction loan is a short-term, interest-only loan used to finance the building of a home or other real estate project. Unlike a traditional mortgage, funds are disbursed in stages (draws) as construction progresses. During the build phase, you pay interest only on the amount drawn. Once construction is complete, the loan either converts to a permanent mortgage (construction-to-permanent) or is paid off through a separate mortgage.
How do draw payments work?
Draw payments are the disbursement of construction loan funds in stages as the project reaches specific milestones. When your contractor completes a phase of work (e.g., foundation, framing, roofing), they submit a draw request to the lender. The lender inspects the work, and if approved, releases funds for that stage. You pay interest only on the amount that has been drawn, not the full loan amount. This means your interest payments start small and increase as more funds are drawn.
What is the typical interest rate for a construction loan?
Construction loan interest rates are typically higher than traditional mortgage rates because the lender assumes more risk (the project may not be completed, or costs may overrun). As of 2024, construction loan rates generally range from prime rate + 1% to prime rate + 3%, which translates to roughly 7–10% APR depending on market conditions. Rates are often variable, meaning they can change during the construction period. Our calculator lets you input your specific rate to see how it affects your payments.
Do I need a down payment for a construction loan?
Yes, most lenders require a down payment of 20–30% for construction loans. This is higher than the typical 3–20% down payment for conventional mortgages. The larger down payment reduces the lender's risk in case the project is not completed or the property value decreases. Some government-backed construction loan programs (like FHA 203(k) or VA construction loans) may offer lower down payment options for qualified borrowers.
Can I convert a construction loan to a permanent mortgage?
Yes, there are two common approaches. A construction-to-permanent (CTP) loan combines both phases into a single loan with one closing — you lock in your permanent rate at the start and the loan automatically converts when construction is complete. Alternatively, a standalone construction loan requires a second closing to obtain a separate mortgage after construction, which means two sets of closing costs and exposure to interest rate changes. CTP loans are generally more convenient and cost-effective.
How long does a construction loan last?
Construction loan terms typically range from 6 to 18 months, though some lenders offer terms up to 36 months. The term should match your expected construction timeline with some buffer for delays. If your project isn't completed within the loan term, you may need to request an extension (usually with additional fees). Our calculator supports terms from 6 to 36 months to help you plan for different project timelines.
What costs are included in a construction loan?
A construction loan typically covers: hard costs (materials, labor, subcontractors), soft costs (architect fees, permits, engineering, inspections, title insurance), and land costs (if you're purchasing the lot). It may also include a contingency reserve (typically 10–15% of the project cost) to cover unexpected expenses. Most lenders will not finance furniture, landscaping, or other non-essential items through the construction loan.
⚠️ Important Disclaimer: Construction loans are complex financial products. This calculator provides estimates only based on interest-only draw calculations and standard amortization formulas. Actual loan terms, rates, and fees vary by lender, location, and project specifics. Consult with lenders, contractors, and financial advisors for accurate project costs, loan terms, and eligibility requirements before making any financial commitments.