How Construction Loan Interest Works
A construction loan is not handed over as a lump sum. The lender releases money in draws tied to milestones — foundation, framing, dry-in, mechanicals, finish — and you pay interest only on what has been drawn so far. Early in the build your balance (and payment) is small; by the final month you are paying interest on nearly the full amount. Because draws ramp up over time, the average outstanding balance across the build is typically about half the total loan, which is the industry rule of thumb this calculator uses: total interest ≈ loan × rate × build years × 0.5.
Example: $300,000 Build at 8% for 12 Months
| Figure | Amount | Note |
|---|---|---|
| Total construction interest (est.) | $12,000 | $300k × 8% × 1 yr × 0.5 avg utilization |
| Average monthly interest | $1,000 | Small early, large late |
| Peak monthly interest | $2,000 | Final month, fully drawn |
| Permanent payment after conversion | $1,896.20 | $300k at 6.5% over 30 years |
Budget for the peak month, not the average — that is the payment you must carry (often alongside rent or an existing mortgage) just before move-in. If you financed your lot separately, the construction-to-perm loan usually pays off that balance at closing; check your current lot payment with the lot loan calculator.
Construction-Only vs. Construction-to-Permanent
A construction-to-permanent (single-close) loan funds the build and automatically converts to a standard mortgage at completion — one approval, one set of closing costs, and a rate you can often lock up front. A construction-only loan must be refinanced into a mortgage when the build finishes, which means second closing costs and rate risk, but lets you shop the permanent loan freely. Most owner-builders working with a bank choose single-close; borrowers expecting rates to fall sometimes prefer two closings. Down payments run 20–25% of total project cost, and land equity usually counts — if your lot is paid off, its value can cover most or all of the required down payment.
Frequently Asked Questions
How accurate is the 50% average-balance rule?
It is the standard budgeting rule and lands close for a typical draw schedule. If your build is front-loaded (big site work or foundation costs early), actual interest runs somewhat higher; if most cost lands late (finishes), it runs lower. Treat the result as a planning estimate, and confirm the draw schedule with your lender.
What rate do construction loans charge?
Construction rates typically run about one point above 30-year mortgage rates, and many are variable (prime + margin) during the build. See our rates guide for how land and construction pricing compares.
Does land equity count toward my down payment?
Usually yes. If you own the lot outright or have equity in it, most lenders credit that value toward the 20–25% down payment required on total project cost — often the biggest advantage of buying land first.