# Construction Loan Calculator Interest on the drawn balance month by month, the interest reserve, and the permanent payment after conversion. --- - **Canonical URL:** https://dothecalculation.com/calculators/construction-loan-calculator - **Category:** Real Estate & Property - **Publisher:** Do The Calculation (https://dothecalculation.com) - **Cost:** Free, no account or sign-up required - **Privacy:** Runs entirely in the browser; inputs are never sent to a server - **Methodology:** https://dothecalculation.com/methodology --- ## Construction Loan Interest, Draws, and the Permanent Payment Interest during a build accrues only on what has been drawn, so the payment grows month by month. This models the whole draw schedule, then the permanent loan that replaces it. - Month-by-month interest on the drawn balance, not a 50% shortcut - Interest reserve, loan fee, and cash required at closing - The amortising payment once the loan converts to permanent ## Quick Answer — How Is Construction Loan Interest Calculated? You pay interest only on the money **actually drawn**, not on the full loan commitment. Each month's interest is the outstanding drawn balance times the monthly rate, so payments start small and grow as the build progresses. • **Total Project Cost** = Land + Build Cost + Contingency • **Loan Amount** = Total Project Cost − Down Payment • **Monthly Interest** = Drawn Balance × (Annual Rate ÷ 12) • **Interest Reserve** = the sum of those monthly amounts across the build **Worked example:** **$120,000** of land plus **$380,000** of build cost with a **10%** contingency (**$38,000**) is a **$538,000** project. At **20%** down (**$107,600**) the loan is **$430,400**, drawn evenly over **12 months** at **$35,866.67** a month. At **8.5%**, the first month's interest is only **$254.06** and the last month's is **$3,048.67**, averaging **$1,651.36**. Total construction interest is **$19,816.33** — the interest reserve. Average outstanding balance works out at **$233,133.33**, or **54.17%** of the commitment, which is why the industry's "assume half the loan" shortcut is close but slightly low for a level draw schedule. ## How to Use This Calculator: A $538,000 Build Enter land and build cost separately, because lenders treat them differently — land you already own usually counts toward your equity contribution rather than being financed. Then add a contingency. **Ten percent is a floor, not a target**: most lenders require one, and builds that run to budget are the exception rather than the rule. The $38,000 contingency in this example is part of the loan commitment, drawn only if needed. Set the down payment as a percentage of total project cost. At **20%** on **$538,000** that is **$107,600**, leaving a **$430,400** loan. Add the loan fee — commonly **1%** — and cash required at closing is **$111,904**. The draw schedule is the part that differs from every other loan. The calculator models **level monthly draws**, so the drawn balance climbs from $35,866.67 after the first month to the full $430,400 at completion, and interest climbs with it. Your first construction payment is **$254.06** and your last is **$3,048.67** — a twelvefold increase over the year, and the reason budgeting the average rather than the peak causes cash-flow trouble late in a build. The interest reserve of **$19,816.33** is usually financed as part of the loan rather than paid from pocket, though this varies. Either way it is a real cost of building and belongs in the project budget. Finally, the permanent loan: **$430,400** at **6.5%** over **30 years** amortises at **$2,720.42** a month. Total cost to build, including construction interest and the loan fee, is **$562,120.33**. ## A Second Example: A Nine-Month Build on Land You Own Owning the land already changes the arithmetic substantially. Take a **$240,000** build with a **15%** contingency (**$36,000**) and no land in the loan — a **$276,000** project — with **25%** down, a **9.25%** construction rate, a **nine-month** build, and a **6.75%** permanent loan. The down payment is **$69,000** and the loan is **$207,000**, drawn at **$23,000** a month. First month's interest is **$177.29**, the final month's is **$1,595.63**, and total construction interest is **$7,978.13** — barely 40% of the first example's, on a project 51% the size, because the build is three months shorter as well as smaller. Average outstanding is **$115,000**, or **55.56%** of the commitment. Note what happens to that percentage as the build shortens: 54.17% over twelve months, 55.56% over nine. A shorter schedule leaves proportionally more of the loan outstanding on average, but for much less time, and the second effect dominates. **Time on the schedule is the biggest controllable driver of construction interest**, which is why draw-schedule delays are expensive in a way that a rate quote does not capture. The loan fee is **$2,070** and cash at closing is **$71,070**. The permanent payment is **$1,342.60** and total cost to build is **$286,048.13**. If the land carries an existing loan, the [land loan calculator](/calculators/land-loan-calculator) prices that side, and most construction lenders will pay it off as part of the facility. ## Construction-to-Permanent, Draws, and What Goes Wrong **Construction-to-permanent** loans close once and convert automatically to a mortgage at completion. **Two-close** structures require a separate refinance at the end, exposing you to whatever rates exist on that date and to a second set of closing costs. The single-close structure removes the rate risk on the back end, which is why it usually costs a little more up front. **Draws follow inspections, not the calendar.** This calculator uses level monthly draws as a planning convention, but real schedules are milestone-based: foundation, framing, dry-in, mechanicals, finishes. A lender inspects before releasing each draw, and the practical consequence is that the builder often carries costs between milestones. Retainage — a percentage of each draw held back until completion — compounds this. **Cost overruns land on you, not the lender.** The loan commitment is fixed at closing. If the build exceeds budget and the contingency, the difference is cash out of pocket, because increasing the commitment mid-build means re-underwriting. This is the single most common reason construction projects become distressed, and it is why a 10% contingency is a floor rather than a comfort. **Time is the other exposure.** A build that slips from nine months to fourteen accrues five extra months of interest at close to the peak balance, and construction rates are typically well above permanent rates. If the extension also pushes past the loan's maturity, extension fees follow. If you are building to sell or to hold as a rental rather than to occupy, run the finished numbers through the [home renovation ROI calculator](/calculators/home-renovation-roi-calculator) to check that the completed value justifies the all-in cost. ## Limitations This calculator models level monthly draws at a fixed construction rate. Real draw schedules are milestone-based and lumpy, and most construction loans are floating-rate — usually priced over a published index — so both the timing and the rate can differ materially from what is modelled. Where the actual schedule is front-loaded, interest will be higher than shown; where it is back-loaded, lower. It does not include soft costs that frequently sit outside the build contract: architectural and engineering fees, permits and impact fees, utility connection charges, surveys, site work on difficult ground, or the cost of temporary housing if you are building while renting elsewhere. On a custom build these can add ten percent or more to the project, and they are the usual reason a contingency gets consumed before framing is finished. The permanent loan figures assume the full construction balance converts at the rate you enter, with no additional principal reduction at conversion and no escrow for taxes and insurance. Actual permanent payments will be higher once escrow items are added, and lenders may re-appraise at completion in a way that changes the loan-to-value and therefore the terms. This is a general educational tool, not lending or construction advice — get written quotes for both the build and the financing, and consult qualified professionals before committing. ## Related Calculators If the land is being bought rather than owned outright, price it with the [Land Loan Calculator](/calculators/land-loan-calculator) — construction lenders commonly pay off a land balance as part of the facility, which is also how a land loan balloon usually gets retired. Once the build is finished, the [Mortgage Calculator](/calculators/mortgage-calculator) adds taxes and insurance to the permanent payment shown here, and the [Home Renovation ROI Calculator](/calculators/home-renovation-roi-calculator) checks whether the completed value justifies the all-in cost. The [Loan Payment Guide](/blog/finance/loan-payment-guide) covers the amortisation formula the permanent loan uses. ## Frequently asked questions ### How is construction loan interest calculated? On the drawn balance only, month by month: Monthly Interest = Drawn Balance × (Annual Rate ÷ 12). On a $430,400 loan drawn evenly over 12 months at 8.5%, the first payment is $254.06 and the last is $3,048.67, totalling $19,816.33 across the build. ### What is an interest reserve on a construction loan? The total interest expected to accrue during the build, usually financed as part of the loan rather than paid from pocket. In the worked example it is $19,816.33 on a $430,400 loan over twelve months — a real project cost that belongs in the budget either way. ### Do you pay the full loan amount in interest during construction? No, and this is the main thing that surprises borrowers. You pay only on what has been drawn. A level draw schedule leaves an average of roughly 54% to 56% of the commitment outstanding over the build, which is where the industry shortcut of assuming half the loan comes from. ### How much down payment does a construction loan need? Commonly 20% to 25% of total project cost, though land you already own frequently counts toward that contribution. On a $538,000 project at 20%, the down payment is $107,600 and cash at closing including a 1% loan fee is $111,904. ### What is a construction-to-permanent loan? A single-close structure that converts automatically to a mortgage at completion, so there is no second closing and no exposure to rates on the conversion date. A two-close structure requires a separate refinance at the end, with a second set of costs and whatever rates then exist. ### How much contingency should a construction budget include? Ten percent is a common minimum and most lenders require one, but treat it as a floor. Soft costs outside the build contract — permits, utility connections, site work, engineering — are the usual reason a contingency is consumed before framing is finished. ### What happens if the build goes over budget? The overrun is yours. The loan commitment is fixed at closing, and increasing it mid-build means re-underwriting, which lenders are slow to do on a half-finished house. This is the most common route from a normal project to a distressed one. ### What does a delay cost on a construction loan? Extra months of interest at close to the peak balance, since delays happen late rather than early. On the worked example, an extra month past completion costs about $3,049 in interest alone — plus any extension fee if the delay pushes past the loan's maturity. ## Related concepts - **Draw Schedule** — Staged releases of loan funds tied to inspected milestones. Interest accrues only on what has been released, which is why early payments are small. - **Interest Reserve** — The projected construction-period interest, usually financed within the loan. A budget item, not a saving. - **Retainage** — A share of each draw held back until completion. It protects the lender and the owner, and it squeezes the builder's cash flow in the meantime. ## Related guides - [Loan Payment Guide: Formula, Interest, and Total Cost](https://dothecalculation.com/blog/finance/loan-payment-guide) — Learn how fixed loan payments are calculated, why term length changes total interest, and how the DTC loan calculator matches amortization math. - [How to Use Do The Calculation Calculators: A Practical Step-by-Step Guide](https://dothecalculation.com/blog/site-guides/how-to-use-calculators) — Learn the fastest reliable workflow for using Do The Calculation calculators, reading results, checking formulas, and using save, print, share, and export actions correctly. ## Related calculators - [Biweekly Mortgage Payment & Payoff Accelerator](https://dothecalculation.com/calculators/biweekly-mortgage-payoff-calculator) — Compare biweekly versus monthly mortgage payment schedules to calculate how much faster you pay off your loan and total interest saved. - [Bridge Loan Calculator](https://dothecalculation.com/calculators/bridge-loan-calculator) — Interest-only cost, origination points, effective annual rate, and the surplus left after the sale. - [Mortgage Recast Calculator](https://dothecalculation.com/calculators/mortgage-recast-calculator) — Re-amortise a mortgage after a lump sum: new payment, interest saved, and the prepay alternative side by side. - [Amortization Calculator](https://dothecalculation.com/calculators/amortization-calculator) — Build a full principal and interest amortization schedule for any loan to see exactly how each payment reduces your balance. - [Home Equity Calculator](https://dothecalculation.com/calculators/home-equity-calculator) — Calculate your current home equity, loan-to-value ratio, borrowing capacity, and projected equity after years of appreciation. - [HELOC Payment & Draw Calculator](https://dothecalculation.com/calculators/home-equity-line-of-credit-heloc-calculator) — Simulate variable-rate HELOC payments, including interest-only draw period payments and later principal-and-interest repayment schedules. --- _This calculator models level monthly draws at a fixed construction rate; real schedules are milestone-based and lumpy, and most construction loans float over an index, so both timing and rate can differ materially. It excludes soft costs — architecture and engineering, permits and impact fees, utility connections, surveys, difficult site work, and temporary housing — which on a custom build can add ten percent or more. Permanent loan figures assume the full balance converts at the rate entered, with no escrow for taxes and insurance and no re-appraisal at completion. This is a general educational tool, not lending or construction advice; get written quotes and consult qualified professionals before committing._ --- _Source: [Do The Calculation](https://dothecalculation.com/calculators/construction-loan-calculator). Quote freely with attribution and a link to this page._