Using the Construction Loan Calculator
Building a custom home or managing a commercial build requires precise financial planning. Our construction loan calculator helps you estimate your monthly carrying costs during the building phase. Unlike traditional mortgages, construction loans are typically interest-only, meaning you only pay interest on the money you have actually drawn from the loan for completed work.
To get started, enter your project details into the fields provided. This tool is designed to show you both your peak monthly payment (the payment you will make once the project is finished but before the loan converts to a permanent mortgage) and the estimated total interest paid during the draw period.
- Total Project Cost
- The complete budget for your build, including land purchase, materials, labor, and permits.
- Down Payment
- The amount of cash you are contributing upfront. Lenders usually require 20% to 25% for construction projects.
- Interest Rate
- The annual percentage rate (APR) charged by your lender during the construction phase.
- Construction Term
- The number of months you expect it will take to complete the building process.
How It Works
Construction loans function as a line of credit. As your builder reaches specific milestones (like pouring the foundation or completing the framing), they "draw" money from the loan. You only pay interest on the outstanding balance. The formula for the peak monthly interest payment is:
Monthly Payment = (Loan Amount × (Annual Rate / 12))
Because the balance starts at zero and grows over time, calculating the exact total interest is difficult without a draw schedule. However, most experts use a "linear draw" estimate, which assumes an average balance of 50% of the loan amount over the entire term.
Calculation Example
Example: Imagine you are building a home with a total budget of $500,000. You have a 20% down payment ($100,000) and a construction loan rate of 8% for a 12-month term.
Step-by-step solution:
- Loan Amount: $500,000 - $100,000 = $400,000
- Monthly Interest Rate: 0.08 / 12 = 0.006667
- Peak Monthly Payment: $400,000 × 0.006667 = $2,666.80
- Estimated Total Interest: ($2,666.80 / 2) × 12 months = $16,000.80
Frequently Asked Questions
What is a draw schedule?
A draw schedule is a timeline of payments made to the contractor as various stages of the project are completed. Lenders usually send an inspector to the site before releasing funds for each draw to ensure the work matches the request.
Does this include the mortgage after construction?
No, this construction loan calculator specifically focuses on the building phase. Once the home is complete, you typically transition into a "permanent" mortgage (e.g., a 30-year fixed loan), which includes both principal and interest payments.
Why are construction loan rates higher than standard mortgages?
Construction loans are considered higher risk by lenders because the collateral (the house) does not fully exist yet. To compensate for this risk and the administrative work of managing draws, rates are usually 0.5% to 2% higher than standard mortgage rates.