Construction Loan Calculator
Estimate the interest-only payments you make while your home is being built, how much interest you pay over the whole construction period, and what your payment becomes once the loan converts to a permanent mortgage.
Disclaimer: This calculator provides estimates for general informational and educational purposes only. It is not financial, lending, tax or legal advice, and it does not guarantee any loan terms, rate, payment or approval. Actual figures depend on your lender, credit, location and the final terms of any loan. Always confirm numbers with a licensed mortgage lender, financial advisor or housing counselor before making a decision.
How a construction loan works
A construction loan is short-term financing that pays for building a home in stages rather than handing over the full amount at closing. The lender releases money in instalments called draws, each tied to a milestone — foundation poured, framing complete, roof on, and so on. Because the cash goes out gradually, you only owe interest on what has actually been disbursed so far. That is why the payments start small and grow as the build progresses and more of the loan is drawn.
During the build you typically pay interest only: each payment covers the interest on the outstanding balance and nothing toward principal. When the home is finished, the loan does one of two things. With a construction-to-permanent loan (also called a "one-time close"), the same loan converts automatically into a standard amortizing mortgage — one closing, one set of fees. With a two-time close, the construction loan is paid off by refinancing into a separate permanent mortgage, which means a second closing and the risk that rates have moved.
The interest-only formula
An interest-only payment is simply the drawn balance multiplied by the
monthly interest rate. For a drawn balance B and a monthly rate
r (your annual rate divided by 12):
Interest-only payment = B × r
Nothing in that payment reduces the loan, so the balance does not fall on its own during construction. The calculator uses this formula twice: once on the full loan amount to find your peak payment in the final month, and once on the average drawn balance to find a representative monthly payment across the whole build.
Why average and peak differ
Early in the build very little has been drawn, so your interest is tiny. Near the end, close to the full loan is outstanding and your interest is at its maximum. The peak figure is that final-month payment on the full balance — the largest interest-only payment you will face. The average figure assumes a steady level of funds drawn across the period (50% by default), which gives a more realistic picture of your typical monthly cost and your total interest over the build. The truth for any project sits between those two numbers, shaped by how fast the draws actually happen.
A worked example
Take the defaults: a $400,000 construction loan at 7.5% over a 12-month build, with an average 50% of funds drawn, converting to a 6.75%, 30-year mortgage.
- Peak interest-only payment on the full balance is about $2,500/month (that is $400,000 × 7.5% ÷ 12).
- At an average 50% drawn, the typical interest-only payment is about $1,250/month.
- Over 12 months that adds up to roughly $15,000 in interest during construction.
- After conversion to a 6.75% loan over 30 years, the amortizing payment is about $2,594/month.
Notice how the early, interest-only payments are far lighter than the permanent mortgage payment — and how the peak payment near completion is double the average. Budget for the larger number, because the final draws arrive just before the loan converts.
What affects your construction-loan cost
- The rate. Construction rates are usually higher than a normal mortgage, and often variable, so the cost can rise while you build.
- The draw schedule. How quickly funds are released — and how fast you use them — drives how much balance accrues interest each month.
- The length of the build. A longer construction period means more interest-only payments, so delays directly add to your interest.
- The permanent rate at conversion. The rate you lock for the long-term mortgage sets your payment for the next 15 to 30 years, and may differ from the rate quoted today.
Construction loans carry higher rates and added risk. Build delays, cost overruns and rate changes before conversion can all push your real cost above this estimate. The numbers here are simplified and assume a steady average draw across the build — confirm the draw schedule, rate and conversion terms with your lender.
Frequently asked questions
How do construction loan payments work?
During the build you usually pay interest only, and only on the money that has actually been disbursed so far. Funds are released in stages called draws as the project hits milestones, so your balance — and your payment — starts small and grows as more is drawn. Once the home is finished the loan either converts to a regular mortgage or is refinanced into one, and you begin paying principal and interest.
What is the difference between interest-only and an amortizing payment?
An interest-only payment covers just the interest on the outstanding balance, so none of it pays down the loan — it is simply the drawn balance multiplied by the monthly rate. An amortizing payment is larger because it includes both interest and principal, which is what gradually pays the loan off over the full term. Construction loans are interest-only during the build, then amortize once they convert to a permanent mortgage.
What is a construction-to-permanent loan versus a two-time close?
A construction-to-permanent (or "one-time close") loan handles both the build and the long-term mortgage in a single closing: when construction finishes, the same loan converts to a standard amortizing mortgage with no second set of fees. A "two-time close" uses a separate short-term construction loan, then you refinance into a permanent mortgage afterward — two closings, two sets of costs, and the risk that rates move before you lock the second loan.
Do I need a bigger down payment for a construction loan?
Usually, yes. Because lending on an unbuilt home is riskier, lenders often want a larger down payment — commonly 20% to 25% of the project cost — plus reserves and a detailed budget. Government-backed programs can lower that, but conventional construction financing tends to require more equity up front than a purchase mortgage.
What rate should I expect on a construction loan?
Construction loan rates are typically higher than a standard mortgage rate because the lender is taking on more risk during the build. Many construction loans also carry a variable rate, so the cost can change while you build. The permanent rate you convert to is set separately and is usually closer to ordinary mortgage rates.
What happens when the home is finished?
When construction is complete and the home passes final inspection, the loan reaches the end of its interest-only period. With a construction-to-permanent loan it converts automatically to an amortizing mortgage at the agreed permanent rate and term. With a two-time-close arrangement you refinance the construction balance into a new mortgage. Either way, your payment switches from interest-only to full principal and interest.
Related tools
Once your loan converts, the refinance calculator helps you check whether refinancing the permanent mortgage later pays off. If you are building before selling your current home, the bridge loan calculator covers short-term gap financing, the closing cost calculator estimates the fees at conversion, and the VA loan calculator is worth a look if you qualify for a VA construction or purchase loan.