How a construction loan is drawn
A construction loan is not paid out in one lump sum. The lender advances part of the land or lot cost at closing and releases the construction budget in draws as work is completed and inspected. Interest is charged only on the amount drawn so far, so the monthly interest starts small and climbs as the project progresses.
This calculator advances the land share at the start of month one and splits the construction funding into one draw per month of the build, each made at the start of that month. Even draws release equal amounts. Front-loaded draws release more early: with a four-month build, the draws are 40%, 30%, 20% and 10% of the construction funding. Back-loaded draws reverse that order. After the build, the whole loan stays outstanding for the sale or refinance period you enter.
Annual rates, monthly interest and the interest reserve
US construction loans are normally quoted as an annual rate. With Year (nominal) selected, the monthly rate is the annual rate divided by 12, so 11% a year is 0.9167% a month. Each month's interest is the amount drawn so far times that monthly rate.
Many lenders require monthly interest-only payments, often taken from an interest reserve set aside in the loan budget. With Paid monthly selected, the interest result is the total you pay over the project, which is the reserve you would need to cover it, and Largest monthly interest shows the payment once the loan is fully drawn. A common shortcut assumes about half the loan is outstanding on average; even draws with no land advance and no sale period are close to that.
Some private lenders let interest accrue and collect it at payoff instead. Choose Rolled up, simple for interest accrued without interest on interest, or Rolled up, compound if unpaid interest is added to the balance monthly and itself attracts interest.
Loan to cost, loan to ARV and the maximum loan
Lenders size a construction loan in two ways and use the lower figure. Loan to cost (LTC) compares the loan with land plus construction costs, and loan to ARV compares it with the as-completed value. On this page, loan to ARV is measured on the loan amount, as US term sheets usually quote it. Most the limits allow is the lower of your LTC limit times total cost and your ARV limit times the as-completed value.
Lender limits vary widely. Private and investor lenders often advertise up to 85% to 90% of cost and around 70% to 75% of ARV, while banks commonly lend less. Enter the limits from your own term sheet; the Lender limits result shows whether your loan is within both or which one it exceeds.
Worked example: a 10-month US build
An investor buys a lot for $200,000, with a construction budget of $600,000 and an as-completed value of $1,100,000. The lender funds 50% of the lot at closing, which is $100,000, and 90% of construction, which is $540,000, in 10 even monthly draws of $54,000. The total loan is $640,000, which is 80% of the $800,000 cost and 58.2% of ARV. With an 85% cost limit and a 75% ARV limit, the most the limits allow is $680,000.
At 11% a year, paid monthly, over a 10-month build and a 2-month sale period, interest totals $48,125.00. That is 0.11 ÷ 12 × ($100,000 × 12 months + $540,000 × 7.5 average months). Two origination points cost $12,800, so the total cost of finance is $60,925.00. The largest monthly interest payment, once all $640,000 is drawn, is $5,866.67.
The draw pattern matters. With the same loan, front-loaded draws raise interest to $55,550.00 and back-loaded draws lower it to $40,700.00. Profit after finance on the even-draw example is $239,075.00, or 27.8% on cost, before selling costs and taxes.
What this calculator does not decide
This is a cost estimate for terms you already have, not a loan approval. Lenders also review your experience, credit, plans and permits, the builder contract, contingency, appraisal and exit plan. Real draws follow inspections and the construction schedule, so actual interest can differ from an even or tapered pattern.
Construction-to-permanent loans for building your own home also convert into a mortgage when the home is finished. This page covers the construction phase only; use a mortgage calculator for the permanent loan.
Use the right country page
This page stays in US dollars and uses US construction-loan terms: an annual rate, origination points, an interest reserve and loan to ARV on the loan amount. The country choices above the inputs open separate local pages. Choosing United Kingdom opens the UK development finance calculator, which uses a monthly rate, rolled-up interest, an arrangement fee and loan to GDV on the gross balance. The inputs reset and amounts are not converted.
If you need short-term money to buy before selling, without construction draws, use the US swing loan calculator instead.
To check how much you might borrow for a self-build before you price it, try the construction loan affordability calculator .
Inputs for the construction loan calculator
Land or lot cost
What you pay for the land or lot. Enter zero if you already own it and are borrowing only for construction.
Build costs
The full construction budget, including soft costs such as permits, architects and a contingency.
As-completed value (ARV)
The appraised value of the finished project, often called the after-repair or as-completed value.
Land advance
The share of the land cost the lender funds at closing. Some lenders count land you already own as equity instead.
Build costs funded
The share of the construction budget released in draws. Many lenders fund 85% to 100% of construction.
Quoted interest rate
The note rate from your term sheet, not the APR. US construction loans are usually quoted per year.
Rate quoted per
Year (nominal) divides the annual rate by 12. Choose Month if your lender quotes a monthly rate.
Build period
Months of construction. One draw is made at the start of each build month.
Sale or refinance period
Months after completion when the full loan is outstanding while you sell or refinance. Enter zero if you repay at completion.
Draw pattern
Even releases equal draws. Front-loaded tapers from large to small and back-loaded from small to large, in straight-line steps.
How interest is paid
Paid monthly covers interest from your cash or an interest reserve. Rolled up adds it to the payoff, either simple or compounded monthly.
Origination fee (points)
One point is 1% of the total loan, paid at closing. This calculator does not add points to the loan.
Exit fee
A percentage some lenders charge at payoff. Enter zero if your term sheet has none.
Exit fee based on
Whether any exit fee is a percentage of the total loan or of the as-completed value.
Other finance costs
Appraisal, inspection, title, legal and broker costs paid separately. They add to the cost of finance, not the loan.
Lender loan-to-cost limit
The highest loan the lender allows as a percentage of land plus construction costs.
Lender ARV limit
The highest loan the lender allows as a percentage of the as-completed value, compared with the loan amount.
CALCULATOR QUESTIONS
US construction loan calculator questions
How is construction loan interest calculated?
Each month, the amount drawn so far is multiplied by the monthly rate, which is the annual rate divided by 12. Because money is drawn in stages, total interest is lower than charging the full loan for the whole term.
How big should my interest reserve be?
Choose Paid monthly and use the Interest result: it is the total interest over the build and sale period. Many investors add a cushion for delays.
What is the difference between LTC and loan to ARV?
LTC compares the loan with land plus construction costs; loan to ARV compares it with the finished value. Lenders cap the loan at the lower of the two.
Are origination points the same as the interest rate?
No. Points are a one-time fee at closing, a percentage of the loan. Interest is charged monthly on the amount drawn.
Does this work for a construction-to-permanent home loan?
It prices the construction phase. Once the home is complete, the balance converts into a mortgage, which you should price separately.
What happens when I change country?
The United Kingdom option opens the separate UK development finance page, in pounds, with its own defaults and terms. Your inputs are reset rather than converted.