Construction Loan Interest Calculator
A construction loan disburses funds in stages as your home is built, and you pay interest only on the amount already drawn. This means your monthly interest payment starts small and grows with each draw. This calculator simulates equal monthly draws over a build period (the most common structure) and shows your estimated monthly interest payment, the growing balance, and the total interest paid before construction is complete and permanent financing takes over.
Construction loan interest formula
Monthly Draw = Total Loan / Build Months
Balance(month m) = Monthly Draw * m
Interest(month m) = Balance(m) * (Annual Rate / 12 / 100)
Total Interest = Sum of all monthly interest charges
This model assumes equal monthly draws (common in residential construction). The outstanding balance grows by one draw amount each month. Interest is charged on the balance at the start of each month at the monthly rate (annual rate / 12 / 100).
Construction loan tips
- A contingency reserve of 10% to 15% of the project cost is standard; lenders typically include this in the loan.
- Inspections or appraisals may be required before each draw is released.
- If construction takes longer than expected, you may need to extend the loan at additional cost.
- Interest paid during construction may be deductible if you itemize (IRS Publication 936, acquisition debt rules apply).
- One-time-close loans lock both construction and permanent terms at origination, reducing rate risk.
Construction loans: frequently asked questions
What is a construction loan?
A construction loan is a short-term, interest-only loan that finances the cost of building a new home. Funds are disbursed in draws (installments) to the builder as each construction phase is completed. You pay interest only on the amount drawn, not the full loan amount.
How does interest accrue on a construction loan?
Interest accrues on the outstanding drawn balance each month. Since the balance starts low and grows as draws are taken, your monthly interest payment also increases over the build period. Total construction-period interest is the sum of all monthly interest charges.
What happens at the end of construction?
Most construction loans are designed to convert to or be replaced by a permanent mortgage when the Certificate of Occupancy is issued. In a construction-to-permanent loan (single-close), the loan automatically converts. In a two-close structure, you obtain a separate permanent mortgage to pay off the construction loan.
Are construction loan rates higher than mortgage rates?
Yes. Construction loans are considered higher risk than permanent mortgages because there is no completed home serving as collateral. Rates are typically 1 to 2 percentage points above comparable fixed-rate mortgages.
Can I lock in my permanent mortgage rate during construction?
With a one-time-close or construction-to-permanent loan, you can lock your permanent rate at origination. This protects against rate increases during a build that may take 6 to 18 months. Two-close loans require you to obtain permanent financing at market rates when construction ends.
Official sources
- Consumer Financial Protection Bureau: Owning a Home.
- HUD: Buying a Home.
Reviewed by the CalculatorHub team, edited by James Graham, 15 June 2026. See our methodology.