Construction Loan Calculator

Calculate interest-only payments during construction, draw schedules, and your permanent mortgage payment after the construction phase converts to a standard loan.

Construction Details

$
$

Included in total project cost

$
%

Typically 80-90%

%

Typically 1-2% above mortgage rates

months

Permanent Mortgage

%
yrs

Ready to Calculate

Enter your construction project details to see interest payments during building and your permanent mortgage payment.

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Pro Tip

Get fixed-price contracts from your builder to protect against cost overruns. Include a 10-15% contingency in your budget for unexpected expenses during construction.

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Understanding Construction Loans

Construction loans are specialized financing products designed to fund the building of a new home or major renovation. Unlike traditional mortgages, construction loans are short-term and disburse funds in stages as the project progresses, with interest accruing only on the amount drawn.

During the construction phase, you make interest-only payments on the amount that has been disbursed. Since funds are released gradually through a draw schedule, your interest payments start small and increase as more money is drawn. This makes the early months more affordable.

When construction is complete, the loan typically converts to a permanent mortgage with standard principal-and-interest payments. Construction-to-permanent loans streamline this process with a single closing. Stand-alone construction loans require a separate permanent mortgage closing.

The total cost of a construction project includes land, hard construction costs, permits, architectural fees, landscaping, and contingencies. Lenders evaluate the total cost and the projected completed value when determining loan terms and the loan-to-cost ratio.

Construction Loan Formulas

Interest During Construction

IO Payment = Drawn Amount × Monthly Rate

Where:

Drawn Amount = Cumulative funds disbursed to date

Monthly Rate = Annual construction rate / 12

Draw = Construction cost / number of months

Example

For a $500,000 project at 80% LTC, 8.5% construction rate, 12-month build:

  • • Loan amount: $500,000 x 80% = $400,000
  • • Monthly draw: ~$33,333 (construction portion)
  • • Month 1 interest: ~$5,667 (on initial land draw)
  • • Month 12 interest: ~$28,333 (on full balance)
  • • Total construction interest: ~$20,000-$25,000

Frequently Asked Questions

How does a construction loan work?
Construction loans are short-term loans that fund the building of a new home. During construction (typically 6-18 months), you make interest-only payments on the amount drawn. Funds are disbursed in stages (draws) as construction milestones are completed. After construction, the loan converts to a permanent mortgage.
What is a construction-to-permanent loan?
A construction-to-permanent (C2P) loan combines the construction phase and permanent mortgage into a single loan with one closing. This saves on closing costs compared to getting separate construction and permanent loans. The interest rate may be fixed or adjust when converting to permanent.
What is a typical LTC ratio for construction loans?
Loan-to-cost (LTC) ratios for construction loans typically range from 75-90%, meaning you need 10-25% as a down payment. The ratio considers the total project cost including land, construction, permits, and fees. Higher LTC ratios may require mortgage insurance.
Why are construction loan rates higher?
Construction loans carry higher rates (typically 1-2% above conventional mortgages) because they are riskier for lenders. The property does not exist yet as collateral, construction delays and cost overruns are common, and the loan requires more oversight through the draw process.
What is a draw schedule?
A draw schedule outlines when construction loan funds are disbursed. Lenders release money at predetermined milestones (foundation, framing, roofing, etc.). An inspector verifies work completion before each draw is approved. You only pay interest on amounts already drawn.