Calculate interest-only payments during construction, total interest costs, and draw schedule. Compare construction-only vs construction-to-permanent loans.
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Construction loans work fundamentally different from traditional mortgages. Instead of receiving the full loan amount upfront, funds are disbursed in stages called draws as your home is built — typically through 4 to 6 phases covering foundation, framing, mechanicals, interior finishes, and final completion. During the construction period (usually 12–18 months), you pay interest only on the amount that has been drawn, meaning your monthly payment starts small and grows as construction progresses. Our construction loan calculator models this phased draw process, showing you exactly what you'll pay each month during construction, the total interest cost before your home is complete, and how your payment changes when the loan converts to a permanent mortgage. Whether you're building a custom home, acting as an owner-builder, or planning a major renovation, understanding these costs before breaking ground is essential for staying within budget.
A construction loan is a short-term financing tool — typically lasting 12 to 18 months — that covers the cost of building a new home or completing a major renovation. Unlike a traditional mortgage where you receive the full loan amount at closing, construction loan funds are released in phases called draws as construction milestones are completed. An inspector verifies each phase before the next draw is released. During the construction period, you make interest-only payments on the amount that has been disbursed, not the full loan amount. This means your first monthly payment might be just a few hundred dollars (interest on the foundation draw), while your final month's payment could be several thousand (interest on the fully drawn balance). After construction is complete, the loan either converts automatically to a permanent mortgage (construction-to-permanent or one-time-close loan) or must be paid off with a separate mortgage (construction-only or two-time-close loan). Construction loan interest rates are typically 1–2 percentage points higher than conventional mortgage rates because the lender takes on more risk — they're lending against a property that doesn't fully exist yet. Down payment requirements usually range from 10% to 25% of the total construction cost, depending on the lender and your creditworthiness.
Monthly Interest Payment Formula
Monthly Interest = Drawn Balance × (Annual Rate ÷ 12)Construction loans charge interest only on drawn funds, meaning your payment increases each month as more money is disbursed. Our calculator models this progressive draw schedule so you know exactly how much total interest you'll pay during the entire construction period — a number that surprises many first-time builders.
During construction, you'll likely still be paying rent or a mortgage on your current home while also making interest-only construction loan payments. Knowing your exact monthly obligation during each phase of construction helps you plan cash flow and avoid financial strain during the building process.
Construction-to-permanent loans have one closing and one set of fees, while construction-only loans require two closings but let you shop for the best permanent mortgage rate. Our calculator shows the total cost of each approach so you can make an informed decision based on your specific situation.
See how your outstanding balance grows through each construction phase with interactive charts and a detailed draw schedule table. Understanding the staircase pattern of disbursements helps you plan for increasing monthly payments and negotiate better draw terms with your builder.
Beyond just the building cost, construction involves interest during the build, closing costs, and potentially two sets of fees. Our calculator gives you the complete financial picture — total project cost including all financing expenses — before you commit to breaking ground.
For construction-to-permanent loans, see exactly how your payment changes when you convert from interest-only to full principal and interest. The transition section shows your new monthly payment, total interest over the mortgage term, and helps you understand the long-term cost of your new home.
You're building a custom single-family home for $350,000–$600,000 with a general contractor. Use the calculator to estimate your monthly interest-only payments during the 12-month build, total interest cost, and what your permanent mortgage payment will be after construction is complete. The 5-phase draw schedule works best for most custom home builds.
Acting as your own general contractor to save on builder markup means you need careful financial planning. Owner-builder construction loans often have slightly higher rates (0.25–0.5% more) and require more documentation. Use our calculator with the Construction-Only loan type since many lenders won't offer one-close loans to owner-builders, and plan for a longer 16–18 month construction timeline.
Purchasing undeveloped land and building on it often involves a combined lot-and-construction loan. Enter the total project cost (land purchase price plus building cost) as your construction cost, and the calculator will show your complete financing picture from lot purchase through final construction draw. Many lenders offer combined financing to simplify the process.
Gut renovations and large home additions often use construction loan financing when the scope exceeds what a home equity loan can cover. Use the 4-phase draw schedule for renovation projects, which have fewer distinct construction milestones. Enter just the renovation cost (not your home's current value) as the construction cost, and set a shorter 6–10 month construction period.
Comparing one-close (construction-to-permanent) versus two-close (construction-only plus refinance) options is one of the most important decisions in construction financing. Use the calculator in both modes to compare total costs: one-close loans save on closing costs but may have slightly higher rates, while two-close loans let you lock in the best available permanent rate when construction finishes.
Construction loan payments are calculated differently from standard mortgages. During construction, you pay interest only on the amount that has been drawn (disbursed), not the full loan amount. The formula is simple: Monthly Payment = Drawn Balance × (Annual Rate ÷ 12). For example, if $100,000 has been drawn on a loan with a 7.5% rate, your monthly payment is $100,000 × (0.075 ÷ 12) = $625. As more draws occur and the balance increases, your monthly payment rises accordingly. This is why construction loan payments start low and increase throughout the building process.
Yes, during the construction phase you typically make interest-only payments. You do not pay any principal during construction — only interest on the amount that has been disbursed to your builder through draws. This keeps your payments lower during the building phase when you may also be paying rent or a mortgage on your current home. Once construction is complete, the loan either converts to a standard principal-and-interest mortgage (construction-to-permanent) or must be refinanced into a permanent mortgage (construction-only).
Payments on a $300,000 construction loan vary throughout the building process because you only pay interest on drawn funds. Assuming 20% down ($60,000), you'd have a $240,000 loan amount. At 7.5% interest with a standard 5-draw schedule over 12 months: Month 1-2 (Foundation, 15% drawn): ~$225/mo. Month 3-4 (Framing, 40% drawn): ~$600/mo. Month 5-6 (Mechanicals, 60% drawn): ~$900/mo. Month 7-9 (Interior, 85% drawn): ~$1,275/mo. Month 10-12 (Complete, 100% drawn): ~$1,500/mo. Total interest during construction: approximately $10,800. After converting to a 30-year mortgage at 6.5%, your permanent payment would be about $1,517/mo.
A construction-to-permanent (C-to-P) loan, also called a one-time-close loan, combines your construction financing and permanent mortgage into a single loan with one closing. During the construction phase, you make interest-only payments on drawn funds. When construction is complete, the loan automatically converts to a permanent mortgage with principal and interest payments — no second closing, no second set of fees, no need to requalify. The permanent rate is typically locked at the original closing. This is the most popular option because it's simpler and less expensive overall, though the rate may be slightly higher than what you could get by shopping separately after construction.
Construction loan draws are periodic disbursements of funds as your home reaches specific construction milestones. Typically, the process works like this: your builder completes a construction phase (e.g., foundation), requests a draw from the lender, the lender sends an inspector to verify the work is complete, and then releases that percentage of the loan funds. Most construction loans use 4–6 draws, with common phases being foundation/site work (10–15%), framing/roofing (20–25%), mechanicals like plumbing, HVAC, and electrical (15–20%), interior finishes such as drywall, flooring, and cabinets (20–25%), and final completion including landscaping and punch list (10–15%). Your interest-only payment is recalculated after each draw based on the new cumulative balance.
Most construction lenders require a down payment of 10–25% of the total construction cost. The exact requirement depends on your credit score, the lender, and the loan program. Conventional construction loans typically require 20–25% down. FHA construction loans (FHA One-Time Close) may allow as little as 3.5% down. VA construction loans are available with 0% down for eligible veterans. If you already own the land, its value may count toward your down payment, potentially reducing or eliminating the cash you need to bring to closing. A larger down payment generally qualifies you for a lower interest rate and better loan terms.
Construction loans have stricter credit requirements than standard mortgages because lenders take on more risk financing a property that doesn't yet exist. Most conventional construction lenders require a minimum credit score of 680, with the best rates going to borrowers with scores of 720 or higher. FHA construction loans may accept scores as low as 580 with a larger down payment (10%+) or 620 for the standard 3.5% down. VA construction loans typically need 620+. Beyond credit score, lenders also want to see stable income, low debt-to-income ratio (usually under 43%), and cash reserves covering 6+ months of construction payments.
The construction phase of a construction loan typically lasts 12 to 18 months, though terms can range from 6 months for simple builds to 24 months for large custom homes. Most lenders cap the construction period at 12–14 months for standard builds and 18–24 months for luxury or complex projects. If construction takes longer than expected, you may need to request an extension from your lender, which usually involves an extension fee of 0.25–0.5% of the loan amount. After the construction phase, a construction-to-permanent loan converts to a standard 15 or 30-year mortgage, while a construction-only loan must be paid off or refinanced.
Construction loan interest rates are typically 1–2 percentage points higher than conventional mortgage rates. As of early 2025, construction loan rates generally range from 7% to 9.5% for borrowers with good credit (700+), compared to 6–7% for standard mortgages. Rates vary based on your credit score, down payment, the lender, and whether it's a fixed or variable rate. Many construction loans use variable rates tied to the prime rate, meaning your rate could change during the construction period. Construction-to-permanent loans may offer a rate lock at closing for the permanent phase, protecting you from rate increases during the build.
The key differences between construction loans and mortgages are significant. With a construction loan, money is disbursed in phases through draws as construction progresses, you pay interest only on the drawn balance, the term is short (12–18 months), rates are higher (7–9%), and the lender requires inspections before each draw. With a mortgage, you receive the full amount at closing, you pay both principal and interest from day one, the term is long (15 or 30 years), rates are lower (6–7%), and the home already exists as collateral. Construction loans also have stricter qualification requirements — higher minimum credit scores, larger down payments, and proof of adequate insurance and builder qualifications. Think of a construction loan as bridge financing that gets your home built, after which it converts to or is replaced by a standard mortgage.