Construction Loan Calculator
Estimate interest-only monthly draw payments and total financing budgets for custom home building and commercial construction projects.
Project & Financing Specs
Financing Estimates
Navigating Construction Financing
Unlike buying an existing home, building a new structure requires construction loans that handle disbursements over multiple phases. This keeps cash flowing as structural stages are completed (excavation, framing, roofing, interior fit-outs).
Interest-Only Payments During Construction
Standard construction loans require interest-only payments, which are calculated based on the outstanding balance of the loan, not the total approved loan limit.
- Disbursement draws: As the builder completes milestones, the lender inspector verifies the work and authorizes a "draw" payment.
- Accumulating Balance: In month 1, you may only have drawn $50,000, so you pay interest on $50,000. By month 10, you may have drawn $400,000, and you pay interest on $400,000.
- Average Outstanding Heuristic: To estimate the overall interest cost, financial models typically assume an average outstanding balance of 50% of the total loan amount over the life of the construction period.
Transitioning to a Permanent Mortgage
Once construction is complete, the loan converts to a traditional amortized mortgage. If you use a single-close loan, this happens automatically. If you use a two-close loan structure, you will close twice and pay two sets of closing costs: once for the construction loan and once for the permanent mortgage.
Frequently Asked Questions
How do construction loans work?
Construction loans are short-term loans (typically 12 to 18 months) used to cover the costs of building a home. Unlike a traditional mortgage, the lender doesn't release the entire loan amount at once. Instead, they distribute the money in stages (draws) as construction milestones are met.
What is an interest-only construction payment?
During the building phase of a construction loan, you only make monthly payments on the interest of the funds that have already been disbursed (drawn), not the full loan balance. This keeps payments lower while the structure is being built.
What is a construction-to-permanent loan?
A construction-to-permanent loan (or one-time close loan) transitions from a short-term construction loan into a standard long-term mortgage (e.g., 30-year fixed) once construction is complete and the home receives a Certificate of Occupancy.