Construction Loan Calculator
Building a custom home? This calculator estimates your construction loan costs, including monthly interest-only payments during the build and the final balance that converts to a permanent mortgage.
Understanding Construction Loan Interest
Construction loans work differently than traditional mortgages. Instead of borrowing the full amount upfront, funds are released in stages as the builder completes work. Interest accrues only on the amount drawn so far, not the total loan amount. This structure keeps your interest costs lower during construction.
Most construction loans charge interest-only payments during the build period. You're not reducing principal, just covering the cost of borrowing. The interest rate is typically 1-2% higher than standard mortgage rates because construction loans carry more risk for lenders.
This calculator estimates your average monthly interest by assuming funds are drawn gradually over the construction period. The actual amount varies month to month as the builder requests draws. After construction, the accumulated interest is usually added to the principal and rolled into your permanent mortgage.
Construction-to-Permanent vs. Stand-Alone Loans
A construction-to-permanent loan combines short-term construction financing and long-term mortgage into one package. You close once, lock your interest rate for both phases, and automatically transition to a traditional mortgage when the house is finished. The main advantage is avoiding double closing costs and the risk of rate increases between construction and conversion.
Stand-alone construction loans require separate financing for the build phase and permanent phase. After construction, you must refinance into a standard mortgage, paying closing costs twice. This approach makes sense if you expect rates to drop during construction or if you want flexibility to shop for the best permanent loan after building.
Both options require detailed plans, contractor agreements, and appraisals before approval. Lenders want to see realistic budgets and timelines. Construction delays or cost overruns can derail financing, so working with experienced builders and maintaining contingency funds is critical.
Managing Construction Loan Costs
The largest controllable cost is the interest rate. Shopping multiple lenders can reveal rate differences of 0.5-1%, which translates to thousands in savings over a typical build. Credit unions and local banks sometimes offer better construction loan rates than large national lenders.
Shortening the construction period reduces total interest paid. A 9-month build costs 25% less interest than a 12-month project at the same rate. Experienced builders with good track records finish faster and stay on schedule, minimizing interest accumulation.
Putting down more than the minimum 20% lowers your loan amount and monthly interest costs. If you already own the land free and clear, lenders may count its appraised value toward the down payment, reducing the cash you need upfront. Ask about lot equity policies when comparing lenders.
Frequently Asked Questions
How do construction loans differ from regular mortgages?
Construction loans are short-term, interest-only loans that pay builders in stages (draws) as work progresses. You only pay interest on the drawn amount during construction. After completion, the loan converts to a standard mortgage or must be refinanced into permanent financing.
What is a construction-to-permanent loan?
Also called a one-time close loan, this combines construction financing and permanent mortgage into a single loan. You close once, lock in your rate, and automatically convert to a traditional mortgage when construction finishes. This saves closing costs compared to two separate loans.
How much down payment do I need for a construction loan?
Most lenders require 20-25% down for construction loans, higher than typical home purchases. The larger down payment protects lenders against cost overruns and the risk of incomplete projects. Some lenders count land equity toward the down payment if you already own the lot.
What are construction loan draws?
Draws are scheduled payments to your builder as work reaches specific milestones (foundation, framing, rough-in, completion). The lender inspects before releasing each draw to verify progress. You pay interest only on the cumulative drawn amount, not the full loan.
What happens if construction goes over budget?
You must cover overruns with cash or additional financing. Lenders approve loans based on plans and budgets; they won't increase funding mid-project. Building in a 10-15% contingency buffer helps avoid this scenario. Some borrowers arrange backup financing like a HELOC on another property.