Construction Loan Calculator
See what a new home build actually costs month to month: the interest-only paymentsas your builder draws down the loan, the total interest you'll pay before move-in, and the permanent mortgage payment once the loan converts.
Construction Phase
Land, materials, labor, permits — everything the finished home costs to build.
20% of the project. Land you already own counts toward this.
Usually variable (prime plus a margin) and above permanent-mortgage rates.
Permanent Mortgage
Final Interest-Only Payment
$2,400
Month 12 of construction, once the full $360,000 is drawn.
Payment After Conversion (P&I)
$2,275
$360,000 at 6.5% over 30 years.
First Month's Payment
$200
Interest on the first $30,000 draw
Average Monthly Payment
$1,300
Across the 12-month build
Total Construction Interest
$15,600
Paid before the first P&I payment
You're putting 20% into the project — in line with what construction lenders expect.
Construction lending is riskier than lending against a finished house: there is no completed home to foreclose on if the build stalls. Lenders offset that by requiring more equity up front than a purchase mortgage does — commonly 20% to 25% of total project cost. Land you already own, free and clear, usually counts toward that equity instead of cash.
Draw Schedule & Interest-Only Payments
Assumes equal $30,000 draws each month. Your real draws follow construction milestones — foundation, framing, drywall — so early months are usually smaller and the ramp is lumpier, but the totals land in the same place.
| Month | Drawn to Date | Remaining to Draw | Interest-Only Payment |
|---|---|---|---|
| 1 | $30,000 | $330,000 | $200 |
| 2 | $60,000 | $300,000 | $400 |
| 3 | $90,000 | $270,000 | $600 |
| 4 | $120,000 | $240,000 | $800 |
| 5 | $150,000 | $210,000 | $1,000 |
| 6 | $180,000 | $180,000 | $1,200 |
| 7 | $210,000 | $150,000 | $1,400 |
| 8 | $240,000 | $120,000 | $1,600 |
| 9 | $270,000 | $90,000 | $1,800 |
| 10 | $300,000 | $60,000 | $2,000 |
| 11 | $330,000 | $30,000 | $2,200 |
| 12 | $360,000 | $0 | $2,400 |
| Total | $360,000 | $0 | $15,600 |
Once the loan converts, the $360,000 balance amortizes like any other mortgage — see it month by month in the amortization schedule.
How Construction Loans Work
A normal mortgage is secured by a house that already exists. A construction loan isn't — the collateral is a set of blueprints and a lot. That single difference explains nearly everything unusual about how these loans behave:
- Money comes in draws, not a lump sum. The lender approves a total budget, then releases it in stages as work is completed — typically lot purchase, foundation, framing, mechanicals, drywall, and final finish. An inspector signs off on each stage before funds move.
- You owe interest only on what's been drawn. In month one you might owe interest on a foundation pour. By the final month you owe interest on the whole balance. The calculator above traces that ramp.
- The term is short. Construction loans run for roughly the length of the build — 12 months is typical. At the end, the balance is due, which means it must convert to or be refinanced into a permanent mortgage.
- Underwriting looks at the builder, too.Expect the lender to review your contractor's license, insurance, financials, and fixed-price contract alongside your own credit and income. A contingency reserve of roughly 5% to 10% of the budget is commonly required for cost overruns.
Because you're financing a project rather than buying a finished product, budget for the same third-party costs a purchase carries — appraisal, title, origination — plus per-draw inspection fees. The closing costs calculator will size the closing side of that for you.
Interest-Only Payments During the Build Phase
During construction you pay interest, and nothing else, on the drawn balance. The payment is small at first and largest in the final month, when the entire loan is outstanding but the house isn't finished yet. That last figure — the peak payment shown above — is the number to stress-test, because it's what you'll owe at the moment the build is most likely to be running late.
Two things make that peak harder than it looks. First, construction rates are usually variable, tied to the prime rate plus a margin, so the payment can rise on its own while you're building. Second, most people building a home are simultaneously paying rent or an existing mortgage. Carrying both is the single most common cash-flow surprise in a new build.
An interest reserveis the standard workaround: the lender funds the monthly interest from within the loan itself, so nothing leaves your bank account during construction. It solves the cash-flow problem by borrowing more, which raises the permanent payment you carry for the next 30 years. Worth taking — but price it, don't assume it's free.
Converting to a Permanent Mortgage
When the certificate of occupancy is issued, the construction loan has to go away. How that happens depends on the structure you chose at the start:
- Single-close (construction-to-permanent). One application, one closing, one set of closing costs. When the build finishes, the loan converts automatically into an amortizing mortgage at the permanent terms agreed up front.
- Two-close.A standalone construction loan, then a separate mortgage to pay it off at completion. You qualify twice and pay closing costs twice — but you're not locked into a permanent rate set a year earlier, which cuts both ways.
The moment of conversion is where the payment shock lands. Interest-only on a partially drawn balance becomes principal-and-interest on the full one, and the jump is steep — compare the two headline numbers above. Nothing about the loan is unusual after that point; it amortizes exactly like any other fixed-rate mortgage, and you can watch the balance fall in the amortization schedule.
One quirk works in your favor: the permanent loan's loan-to-value is measured against the home's appraised value when complete, not what you spent building it. If the finished house appraises above cost, you may land under 80% LTV and skip mortgage insurance entirely — check the threshold with the PMI calculator.
What to Compare Between Construction Lenders
Fewer lenders write construction loans than write mortgages, and terms vary far more than they do on a conventional purchase. Community banks and credit unions are often more competitive here than national lenders. The rate is not the whole comparison — ask every lender the same five questions:
- Single-close or two-close? A second closing can cost thousands. Get the all-in cost of each path, not just the rate.
- How is the construction rate set? Prime plus what margin, and can it move during the build? Ask for the current rate and the cap, if any.
- How long is the permanent rate locked? A single-close loan needs a lock that survives the full build. A 12-month build with a 6-month lock is a problem.
- What do draws cost? How many draws are included, what does each inspection fee run, and how many days from request to funding? Slow draws stall builders.
- What reserves are required? Contingency for overruns, interest reserve, and whether either is inside your approved amount or stacked on top of it.
Before you shop, know what payment you're shopping toward. Size the permanent mortgage you can comfortably carry with the affordability calculator or the mortgage payment calculator, then work backward to a project budget.
Frequently Asked Questions
How does a construction loan work?
A construction loan funds a home that doesn't exist yet, so it can't work like a mortgage that hands you the full balance at closing. Instead the lender approves a total amount and releases it in draws as the build hits milestones — lot, foundation, framing, mechanicals, drywall, finish. An inspector typically verifies each stage before the money is released. You only owe interest on what has actually been drawn, so payments start small and grow as the house goes up. The loan is short-term, usually matching the build schedule (often 12 months), and it has to be paid off or converted to a permanent mortgage when construction finishes.
What is a construction-to-permanent loan?
A construction-to-permanent loan (a "single-close" or "one-time close" loan) bundles the construction financing and the permanent mortgage into one loan with one closing. You pay interest-only during the build, then the loan automatically converts to a standard amortizing mortgage when the home is finished. The alternative — a "two-close" structure — is a standalone construction loan that you refinance into a separate mortgage at completion, which means qualifying twice and paying two sets of closing costs. Single-close avoids the second closing and the risk that rates or your finances have moved against you by completion day.
Why are construction loan rates higher than mortgage rates?
If a borrower defaults on a mortgage, the lender forecloses on a finished, sellable house. If a borrower defaults halfway through a build, the lender is left with a half-framed structure that is worth less than the money already spent on it, and finishing it costs more still. That extra risk is priced in. Construction rates are also usually variable — commonly quoted as the prime rate plus a margin — rather than fixed, so the rate can move during the build. The permanent rate you convert to is a separate, typically lower, fixed rate.
Do I pay principal during construction?
No. During the build phase you pay interest only, calculated on the balance drawn so far rather than the full approved amount. Because the drawn balance climbs with each milestone, the interest payment climbs too — the calculator above shows exactly how far. The principal balance is untouched until the loan converts to a permanent mortgage, at which point amortization begins and your payment jumps to cover both principal and interest.
Can I roll the construction interest into the loan?
Often, yes. Many lenders let you build an interest reserve into the loan amount, and the monthly interest is drawn from that reserve rather than paid out of pocket. It is convenient if you are also paying rent or an existing mortgage while the house is being built, but it isn't free: the reserve is borrowed money, so it increases your loan balance and the permanent payment you'll make for the next 30 years. Ask whether the reserve is included in your approved amount or added on top of it.
How much down payment does a construction loan require?
More than a purchase mortgage. Construction lenders commonly want 20% to 25% of total project cost as equity, because there's no finished home securing the loan while it's being built. If you already own the lot free and clear, its appraised value usually counts toward that equity requirement instead of cash — for many borrowers the land is the down payment. Government-backed options exist with lower requirements: VA and USDA construction loans can go to zero down for eligible borrowers, and FHA offers a construction-to-permanent product, though relatively few lenders originate them.