How construction loan interest is calculated
A construction loan is paid out in draws as the work is inspected. Each month, interest is charged only on the amount drawn so far, at the annual rate divided by 12. Payments start small and grow as the builder draws more, reaching their peak once the loan is fully drawn.
Because of this, total interest depends on the average balance outstanding, not the full loan. A common rule of thumb assumes about half the loan is outstanding on average; this calculator works out the actual average from the draw schedule, including any amount drawn at closing for the land.
Interest reserve and payment options
Most US construction loans require monthly interest-only payments, often paid from an interest reserve in the loan budget. With Paid monthly selected, the total interest is the reserve you need, and the largest monthly payment shows the payment once the loan is fully drawn. Some private lenders let interest accrue until payoff instead; choose Rolled up to see that cost.
Worked example: a $640,000 construction loan
A $640,000 construction loan has $100,000 drawn at closing for the lot and $540,000 drawn in 10 equal monthly draws of $54,000, followed by two months while the home sells or the loan is refinanced. The average balance outstanding over the 12 months is $437,500, or 68.4% of the loan.
At 11% a year with interest paid monthly, total interest is $48,125.00. The first payment is $1,411.67 on $154,000 drawn, and the largest is $5,866.67 once all $640,000 is drawn. If the whole loan had been funded at closing, interest would have been $70,400.00, so staged draws save $22,275.00.
Points, loan limits and the full cost
This page focuses on interest. Origination points, loan to cost, loan to ARV and the maximum loan are on the US construction loan calculator, which uses the same draw model so the interest figures match.
For points, loan limits and the full cost of financing, use the US construction loan calculator .
If the loan also buys the land, use the US acquisition and construction loan calculator .
Use the right country page
This page stays in US dollars and uses US terms: an annual rate, construction draws and monthly interest payments. The country choices above the inputs open separate local pages. Choosing United Kingdom opens the UK development loan interest calculator, which uses a monthly rate and rolled-up interest. The inputs reset and amounts are not converted.
Inputs for the construction loan interest calculator
Total construction loan
The whole loan once fully drawn, including any amount drawn at closing.
Drawn at closing
The amount funded at closing, for example for the land or lot. Enter zero if none.
Quoted interest rate
The note rate, not the APR. US construction loans are usually quoted per year.
Rate quoted per
Year (nominal) divides the annual rate by 12. Choose Month for a monthly rate.
Build period
Months of construction. One draw is made at the start of each month.
Sale or refinance period
Months after completion while the whole loan is outstanding.
Draw pattern
Even draws, or front-loaded or back-loaded draws that taper in straight-line steps.
How interest is paid
Paid monthly is usual, often from an interest reserve. Rolled up adds interest to the payoff.
CALCULATOR QUESTIONS
US construction loan interest calculator questions
How do you calculate interest on a construction loan?
Each month, multiply the amount drawn so far by the annual rate divided by 12. Add up the months to get the total interest.
Why are my construction loan payments going up?
Because each draw adds to the balance you pay interest on. Payments peak once the loan is fully drawn.
How much of the loan is outstanding on average?
It depends on the draw schedule and any amount drawn at closing. The calculator works out the actual average; even draws with nothing at closing average about half.
How big should the interest reserve be?
Choose Paid monthly and use the total interest. Many lenders and investors add a cushion for delays.
What happens when I change country?
The United Kingdom option opens the separate UK development loan interest page, in pounds, with a monthly rate. Your inputs are reset rather than converted.