Construction Loan Calculator
Estimate your construction loan payments for new builds and major renovations. See how payments change from the interest-only construction phase to a permanent mortgage.
Amortization Schedule
Understanding Construction Loans
Building a new home or undertaking a major renovation requires specialized financing that differs significantly from a traditional mortgage. Construction loans are designed to fund the building process, with unique payment structures and requirements that borrowers need to understand before committing. Our construction loan calculator helps you estimate the permanent mortgage payment you will face once building is complete.
What Is a Construction Loan?
A construction loan is a short-term financing product used to fund the building of a new home or major renovation project. Unlike a standard mortgage where you receive the full loan amount upfront, construction loans are disbursed in stages called draws. Each draw corresponds to a completed phase of construction, such as foundation, framing, roofing, and finishing. The lender typically sends an inspector to verify that each phase is complete before releasing the next draw. This staged approach protects both the lender and the borrower by ensuring funds are used for their intended purpose.
How Construction Loans Differ from Traditional Mortgages
Construction loans differ from traditional mortgages in several key ways. First, they are typically shorter in duration, lasting only the construction period plus a short window for completion. Second, interest rates on construction loans are higher than conventional mortgage rates because the lender assumes more risk: there is no completed property to serve as collateral. Third, the qualification process is more stringent, often requiring detailed building plans, a construction budget, a licensed contractor, and sometimes an appraisal of the planned home. Finally, rather than receiving a lump sum, funds are released incrementally as construction progresses through the draw schedule.
Interest-Only During the Construction Phase
One feature that makes construction loans more manageable is the interest-only payment structure during the build phase. Instead of making full principal and interest payments from day one, borrowers pay only the interest on the amount that has been drawn so far. For example, if your total construction loan is $350,000 but only $100,000 has been drawn after the first month, your interest-only payment is based on $100,000, not the full loan amount. As more draws are released, the interest-only payment increases gradually. This structure keeps payments lower during construction when you may also be paying for temporary housing or your current mortgage. Use our calculator above to estimate what your full payment will be once the loan converts to permanent financing.
Converting to a Permanent Mortgage
Once construction is complete, the loan transitions to the permanent phase. There are two main types of construction loans. A construction-to-permanent loan (also called a single-close or one-time-close loan) automatically converts to a standard mortgage after construction, locking in your permanent rate upfront. This eliminates the need for a second closing and additional closing costs. A stand-alone construction loan must be paid off or refinanced into a separate mortgage once building is finished, requiring two separate loan applications and closings. Construction-to-permanent loans are generally preferred because they offer rate certainty and cost savings, though stand-alone loans may provide more flexibility in shopping for the best permanent mortgage rate after construction.
Tips for Managing Construction Loan Costs
Managing a construction loan effectively starts with careful planning. Build a contingency budget of 10 to 20 percent above your estimated construction costs, as overruns are common. Choose an experienced, licensed contractor with a solid track record, as lender requirements for contractor credentials can affect loan approval. Lock in your permanent mortgage rate early if using a construction-to-permanent loan to protect against rate increases during the build. Make sure your construction timeline is realistic, as extensions can be costly and some loans impose penalties for delays. Finally, consider making extra payments toward principal once the loan converts to permanent financing to reduce total interest costs over the life of the loan. Explore our DSCR calculator for investment property construction, or the home equity calculator if you are using equity to fund your build.
Frequently Asked Questions
How does a construction loan work?
A construction loan provides financing in stages (called draws) as building progresses. During the construction phase, typically 6 to 18 months, you usually make interest-only payments on the amount drawn. Once construction is complete, the loan either converts to a permanent mortgage (construction-to-permanent loan) or must be paid off or refinanced into a traditional mortgage. Funds are released incrementally as each phase of construction is completed and verified by an inspector.
What is the typical interest rate for construction loans?
Construction loan interest rates are typically 1 to 3 percentage points higher than traditional mortgage rates because of the higher risk involved. As of recent market conditions, construction loan rates generally range from 7% to 12% depending on the borrower's creditworthiness, the lender, the loan-to-cost ratio, and whether the loan is a construction-to-permanent product or a stand-alone construction loan. Construction-to-permanent loans often offer slightly lower rates since the permanent phase reduces the lender's long-term risk.
What happens after construction is complete?
After construction is complete, the loan transitions to the permanent phase. With a construction-to-permanent loan, this happens automatically: the loan converts to a standard fixed-rate or adjustable-rate mortgage and you begin making full principal and interest payments. With a stand-alone construction loan, you must refinance or pay off the balance, typically by obtaining a traditional mortgage on the newly built home. A final inspection and certificate of occupancy are usually required before the conversion or refinance can proceed.