Understanding your construction loan estimate
The table below contrasts the construction (draw) phase with the permanent mortgage phase that typically follows, since a construction-to-permanent loan changes structure once the build is finished.
| Phase | How interest is charged | Typical payment structure |
|---|---|---|
| Construction (draw) period | Interest-only, generally on the amount actually drawn to date | Payments often cover interest only, rising as more funds are drawn |
| After conversion to a permanent mortgage | Standard amortization on the full disbursed amount | Fixed principal-and-interest payment over the mortgage term |
- This calculator's linear-draw assumption is a simplification for early estimating purposes; an actual draw schedule tied to construction milestones (foundation, framing, roofing, and so on) is rarely perfectly linear, so the true interest cost on a specific project will differ from this estimate.
- This calculator does not model the permanent mortgage phase that follows construction on a construction-to-permanent loan, nor any construction loan fees, inspection fees, or contingency draws.
- Construction loans often carry higher interest rates than standard permanent mortgages, reflecting the shorter term and the additional risk lenders associate with financing a project still being built.
What is a construction loan?
A construction loan finances the building of a home or other structure and is typically structured as interest-only during the build, with the lender releasing funds in stages — known as draws — tied to completed phases of construction, rather than disbursing the entire loan amount at closing. Because interest generally accrues only on the amount actually drawn, not the full committed loan, the interest cost during construction is lower than it would be if the full balance accrued interest from day one.
Many construction loans are structured as construction-to-permanent loans, which convert automatically into a standard amortizing mortgage once the building is complete, avoiding a second closing and a second set of costs. Freddie Mac and Fannie Mae both publish guidelines for single-close construction-to-permanent loan programs used by conforming lenders.
Because the exact timing and size of draws vary by project and lender, this calculator applies a standard estimating convention: it assumes funds are drawn in a straight, linear pattern over the construction period, which is a commonly used simplification for estimating total interest before a specific draw schedule exists.
How to use this construction loan calculator
- Enter the total construction loan amount you expect to draw over the course of the build.
- Enter the annual interest rate quoted for the construction loan.
- Enter the expected construction period in months.
- Read the estimated total interest under the linear-draw assumption, the peak monthly interest (once the full amount has been drawn), and the average monthly interest across the construction period.
The linear-draw interest formula
Under a linear-draw assumption, the loan balance grows evenly from zero at the start of construction to the full loan amount at the end, so the average outstanding balance over the whole period is exactly half the total amount. Interest for month k is approximately the balance at that point (amount × k ÷ total months) multiplied by the monthly rate.
Summing that monthly interest across every month of the construction period gives a single closed-form estimate: total interest equals the full loan amount multiplied by the monthly rate, multiplied by (months + 1) divided by 2. Peak monthly interest is what a single month would cost once the loan is fully drawn, and average monthly interest is simply the estimated total divided by the number of months.
Common mistakes
- Assuming interest is charged on the full loan amount from the first day of construction — most construction loans charge interest only on funds actually drawn, which this calculator's linear-draw estimate approximates.
- Using the peak monthly interest figure as the typical monthly cost throughout the whole build — early months, with little of the loan drawn, cost far less than the peak figure.
- Forgetting that a construction loan is usually a separate, shorter-term product from the permanent mortgage that follows, with its own rate, fees and (for two-close structures) its own closing costs.
- Assuming the linear-draw assumption exactly matches a real project's draw schedule — actual draws are tied to construction milestones and are rarely perfectly even over time.
- Overlooking that construction loan rates are typically higher than standard mortgage rates, which increases the interest cost relative to financing the same amount with a standard permanent mortgage.
よくある質問
How is interest calculated on a construction loan?
Interest on a construction loan is typically charged only on the portion of funds actually drawn to date, not the full committed loan amount. This calculator estimates that cost using a linear-draw assumption — funds released evenly over the build period — which produces a single estimate for total interest before an actual milestone-based draw schedule exists.
What does 'linear-draw' mean in this calculator?
A linear-draw assumption treats the loan balance as growing evenly, in a straight line, from zero at the start of construction to the full loan amount at completion. This is a standard simplification for early interest estimates, since it allows a closed-form calculation without needing a project's specific milestone-based draw schedule.
What is a construction-to-permanent loan?
A construction-to-permanent loan combines the construction loan and the eventual mortgage into a single loan with one closing: it functions as an interest-only construction loan during the build, then automatically converts to a standard amortizing mortgage once construction is complete. Freddie Mac and Fannie Mae both publish guidelines for single-close construction-to-permanent programs used by conforming lenders.
Why are construction loan interest rates usually higher than mortgage rates?
Construction loans are shorter-term and finance a project that is still being built rather than a completed, appraised asset, which lenders generally treat as carrying more risk than a standard permanent mortgage on a finished home. That added risk is typically reflected in a higher interest rate during the construction period.
Does this calculator include the permanent mortgage after construction is finished?
No. This calculator estimates only the interest cost during the construction (draw) period itself. Once a construction-to-permanent loan converts to a standard mortgage, a regular mortgage calculator using the final disbursed amount, the permanent rate, and the mortgage term should be used to estimate the following payments.
参考文献
- Freddie Mac. Construction Conversion and Renovation Mortgages guidelines. freddiemac.com.
- Fannie Mae. Single-Close Construction-to-Permanent Financing guidelines. fanniemae.com.
- US Department of Housing and Urban Development (HUD). Buying a home: construction and renovation loan programs. hud.gov.
- Consumer Financial Protection Bureau (CFPB). Your Home Loan Toolkit — a step-by-step guide to shopping for a mortgage. consumerfinance.gov.
- Brueggeman WB, Fisher JD. Real Estate Finance and Investments. 15th ed. McGraw-Hill Education, 2019.