Construction Loan Calculator

How Do Construction Loans Work?

Construction loans are short-term financing options used to cover the cost of building a new property or completing a major renovation. Unlike traditional mortgages, construction loans disburse funds in stages called draws, which align with key milestones in the building process such as site preparation, foundation, framing, mechanical systems, and finish work. During the construction phase, borrowers typically make interest-only payments based on the amount drawn to date, meaning monthly payments increase as the project progresses. Most construction loan terms range from 6 to 24 months, after which the borrower either pays off the loan or converts it into a permanent mortgage through a construction-to-permanent loan. Lenders generally require a down payment of 20–25% and charge higher interest rates than conventional mortgages due to the increased risk associated with unfinished properties.

How We Calculate Construction Loan Costs

This calculator estimates your total construction loan costs using two core formulas that cover both the construction phase and optional permanent loan conversion. We take a look at each below:

Construction Phase Interest Formula — Interest-Only on Increasing Balance

Total Construction Interest = Sum of (Outstanding Balance × Monthly Interest Rate) for Each Draw Period

• Outstanding Balance — This increases with each draw as funds are disbursed. If you select Equal Monthly Draws, the balance increases by the same amount each month. If you select a phased draw schedule (4-Phase or 5-Phase), the balance increases according to standard construction milestone percentages.
• Monthly Interest Rate — Your annual interest rate divided by 12. For example, an 8.5% annual rate equals approximately 0.708% per month.

Construction Phase Interest Formula — Interest-Only on Increasing Balance

Monthly P&I Payment = Loan Balance × [r(1 + r)^n] / [(1 + r)^n – 1]

• Loan Balance — The construction loan amount carried into the permanent mortgage. If you selected an interest reserve, accumulated construction interest is added to this balance.
• r — The monthly interest rate for the permanent loan (annual rate ÷ 12).
• n — The total number of monthly payments (loan term in years × 12).

How the Construction Loan Calculator Works

This calculator simplifies the process of estimating construction loan costs across the entire lifecycle of your project. Enter the following inputs to get a detailed cost breakdown:

1. Total Construction Cost ($) — The total estimated cost of your construction project, including materials, labor, and contractor fees.
2. Down Payment (%) — The percentage you will put down upfront, which is subtracted from the total cost to determine your loan amount.
3. Loan Term (Months) — The duration of the construction phase, typically ranging from 6 to 24 months.
4. Annual Interest Rate (%) — The interest rate on your construction loan, adjustable via the slider from 5% to 15%.
5. Draw Schedule — How loan funds will be disbursed during construction: Equal Monthly Draws, 4-Phase (Foundation, Framing, Mechanical, Finish), or 5-Phase (Site Prep, Foundation, Framing, Mechanical, Finish).
6. Origination Fee (%) — The lender fee charged at closing, typically 1–2% of the loan amount.
7. Inspection/Draw Fee ($) — The per-draw fee charged by the lender for each disbursement inspection.
8. Interest Reserve — Whether to roll interest payments into the loan balance or pay them out of pocket monthly during construction.
9. Permanent Loan Rate (%) — If converting to a permanent mortgage after construction, enter the expected fixed interest rate.
10. Permanent Loan Term — The length of the permanent mortgage, either 15 or 30 years.