Construction Loan Calculator — Draw Schedule, Land Equity & True Build Cost 2026
Your builder quoted $380,000 to build the house. Your lender quoted 8.5% for the construction period, converting to 7.0% permanent once it’s done. What nobody told you: you won’t owe interest on $380,000 from day one. You owe interest only on funds drawn — and funds are released in stages as each milestone completes. Month one, you draw 20% for foundation. Month five, you’ve drawn 65%. By month twelve, the full amount is drawn and you convert to a permanent mortgage. Your construction interest cost is a fraction of what a simple rate × loan calculation shows.
A construction loan calculator estimates interest during the construction phase based on progressive draws, calculates the permanent loan payment after project completion, models land equity as a down payment credit, and shows the total cost of building across both the construction and permanent phases.
Construction Loan Calculator
Draw Schedule · Interest Reserve · Land Equity · 1-Close vs 2-Close · 2026 Rates
Your land equity reduces cash down payment needed
⚠️ Lenders typically require 5–10% contingency — cost overruns are common
2026: Bank 7.3%–9.25% · Private/hard money 10%–14%
When ON: IO payments during construction are rolled into the loan balance — no out-of-pocket during build
Enter your build cost to see month-by-month draw interest, interest reserve, two-phase payments, and total cost analysis.
This calculator models the draw schedule across five construction milestones, auto-credits your land equity against your down payment, shows the complete comparison between one-time and two-time close — including the $8,000 closing cost difference — and calculates your true total cost to build including construction interest, permanent loan interest, and closing costs combined.
What Is a Construction Loan? — Types and How They Work
A construction loan is short-term financing that funds the building of a home or commercial structure. Unlike a standard mortgage — where the full loan amount is disbursed at closing — construction loans release funds in draws as construction milestones are completed. You pay interest only on amounts drawn, not the full loan commitment. When construction is complete, the loan either converts to a permanent mortgage or is paid off with a separate refinance.
Construction-to-Permanent Loan (1-Time Close)
Also called a “construction-to-perm” or C2P loan, this structure combines the construction loan and permanent mortgage into a single closing. You close once, lock your permanent rate upfront, and the loan automatically converts from the construction phase to the permanent phase when the certificate of occupancy is issued.
How it works:
- One closing, one set of closing costs (~$8,000 typical)
- Rate locks at closing for the permanent phase
- Interest-only payments on drawn funds during construction
- Automatically converts to permanent P&I mortgage at completion
- No second appraisal or qualification required at conversion
The primary advantage is rate certainty — you lock your permanent rate before construction begins, eliminating the risk of rates rising during the 12–18 month build period. The primary disadvantage is reduced flexibility — if you need more time or want to shop for a better permanent rate after completion, the 1-time close doesn’t allow it.
Stand-Alone Construction Loan (2-Time Close)
A stand-alone construction loan covers only the construction phase. When the home is complete, you apply separately for a permanent mortgage — a second closing with new costs, new qualification, and the rate available at that future date.
How it works:
- Two closings, two sets of closing costs (~$16,000 total)
- Construction rate during build, permanent rate determined at completion
- More lender flexibility during construction
- Rates unknown until the permanent loan closes
- Requires re-qualification at the permanent stage
The advantage is flexibility — if rates fall during construction, you benefit. If your financial situation improves, you can qualify for better permanent terms. The disadvantage is uncertainty — if rates rise or your financial situation changes, your permanent loan could be more expensive than expected.
1-Time Close vs 2-Time Close — Which Saves More?
The calculator shows this comparison explicitly because it’s one of the most consequential decisions in new construction financing:
| 1-Time Close | 2-Time Close | |
|---|---|---|
| Number of closings | 1 | 2 |
| Closing costs | ~$8,000 | ~$16,000 |
| Rate lock | Locked upfront ✅ | Rate unknown later ⚠️ |
| Best for | Rate certainty + savings | Rate flexibility |
| Verdict | Saves ~$8,000 | — |
For most borrowers who don’t have strong conviction that rates will fall during their build period, the 1-time close wins — the $8,000 guaranteed saving on closing costs typically outweighs the option value of waiting for a potentially better rate.
How to Use This Construction Loan Calculator
Land Situation — Your Land as Equity Credit
The land situation toggle is the feature most construction loan calculators skip entirely. Select your scenario:
I Own the Land: You purchased the land separately and own it outright. Its appraised value counts as equity toward the project — directly reducing the cash down payment you need.
Buying Land + Building: You’re purchasing land simultaneously with the construction loan. The land cost is included in the total project budget.
Land Already in Loan: You have an existing loan on the land. The equity in the land (current value minus loan balance) counts toward the project, but the existing loan must be accounted for in total debt.
How land equity works as a down payment credit:
Example: Land value $75,000 (owned free and clear)
Construction cost: $350,000
Contingency (10%): $35,000
Total project cost: $460,000
Land equity credit: $75,000
Cash down payment needed: $460,000 × 20% − $75,000 = $92,000 − $75,000 = $17,000
Without the land equity credit, you’d need $92,000 cash down. With it, $17,000. Enter your land value in the Land Value/Appraised Value field and the calculator automatically credits it against your required down payment.
→ Toggle between the three land situations above to see how your loan amount and cash requirement change instantly.
Project Budget and Contingency Reserve
Total Build/Construction Cost: Your contractor’s bid or estimate. This is the hard construction cost — labour and materials to complete the home to finished condition. Do not include land cost here if you’re using the “Buying Land + Building” option — that’s handled separately.
Contingency Reserve: The slider defaults to 10%. Construction lenders typically require 5–10% contingency as part of the loan because cost overruns are common — materials cost changes, unforeseen site conditions, scope additions. This reserve is held by the lender and released only if needed. If unused, it reduces your loan balance at conversion.
Why 10% matters: On a $350,000 build, 10% contingency adds $35,000 to your project budget. This isn’t extra spending — it’s insurance against the most common construction risk. Underfunding contingency is the primary cause of construction loan draws exceeding the original budget.
Construction Rate vs Permanent Take-Out Rate
The calculator uses two different rates:
Construction Rate (short-term): The rate charged on drawn funds during the construction phase. Typically prime-based or fixed for the period. In 2026, bank construction rates run 7.3%–9.25%; private/hard money lenders charge 10%–14% for faster or more flexible approvals.
Permanent Take-Out Rate (long-term): The rate your loan converts to when construction is complete — your standard 15, 20, or 30-year mortgage rate. For 1-time close loans, this is locked at origination. For 2-time close loans, this rate is determined at the time you apply for permanent financing.
The interest you owe during construction is calculated at the construction rate on drawn amounts only. The interest you owe over the life of the home is calculated at the permanent rate on the full loan balance.
Draw Schedule — How Interest Grows Per Milestone
This is the feature that makes this calculator different from every basic construction loan calculator. The draw schedule shows five construction milestones, each with a percentage of the total loan that gets released at that stage:
1. Foundation / Site Prep 20% of loan
2. Framing / Structure 25% of loan
3. Rough-In (Plumbing/Elec) 20% of loan
4. Drywall / Interior 20% of loan
5. Completion / Finishes 15% of loan
──────────────
Total 100%
You pay interest only on the cumulative drawn amount — not the full loan. This is why construction interest is significantly less than a simple rate × full balance calculation. In months 1–2 (foundation only), you’ve drawn 20% of the loan. By months 6–7 (rough-in complete), you’ve drawn 65%. Only after month 12 (all five milestones complete) are you paying interest on the full amount.
Draw schedule interest on $300,000 construction loan at 8.5%:
| Milestone | Drawn | Monthly IO |
|---|---|---|
| Foundation (Mo 1–2) | $60,000 | $425/month |
| Framing (Mo 3–5) | $135,000 | $956/month |
| Rough-In (Mo 6–7) | $195,000 | $1,381/month |
| Drywall (Mo 8–9) | $255,000 | $1,806/month |
| Completion (Mo 10–12) | $300,000 | $2,125/month |
Adjust the draw percentage sliders to match your project’s actual milestone structure — some projects draw more upfront for site work; custom homes may have different sequencing.
Interest Reserve — Pay As You Go vs Finance
Off — Pay as you go: You pay the monthly interest charges out of pocket during construction. These payments reduce throughout the construction phase as draws increase your balance. Many borrowers prefer this because it keeps their loan balance lower at conversion.
On — Finance reserve: The expected interest payments are rolled into the loan balance upfront. No out-of-pocket interest during construction — but your loan amount at conversion is higher because accumulated interest was added to the principal. This option preserves cash flow during the build but increases your permanent loan balance and monthly mortgage payment.
Understanding Your Results
During Construction vs After Completion
The two hero numbers show your cost in each phase:
During Construction: Your monthly interest-only payment on drawn funds. This starts low (you’ve only drawn 20% for foundation) and grows as draws occur. The number shown reflects the average over the construction period — see the draw schedule table for month-by-month amounts.
After Completion: Your permanent monthly payment — principal and interest — on the full loan balance at your permanent rate and selected term. This is the payment you’ll make for 15, 20, or 30 years.
Draw Schedule Table — Monthly IO Per Milestone
The table shows every milestone with:
- Draw: The dollar amount released at this stage
- Cumulative: Total drawn to date
- Monthly IO: Your interest-only payment after this draw (at the construction rate)
This is the output no competitor calculator shows. Most tools give you “construction phase interest: $X total” without showing how that interest accumulates. Seeing the milestone-by-milestone growth helps you plan cash flow during the build.
Total True Cost of Building
This is the complete picture most builders and lenders don’t assemble for you:
Construction Phase Interest: Your IO payments × months
+ Permanent Loan Interest: 30 years of mortgage interest
+ Closing Costs: 1-time or 2-time close estimate
= Total Cost to Build
On a $300,000 construction loan converting to a $300,000 30-year mortgage at 7.0%: permanent loan interest alone is approximately $419,000 over 30 years. Adding construction interest of approximately $18,000 and closing costs of $8,000, your total cost to build is approximately $745,000 — more than twice the construction budget. This is the number to evaluate when deciding whether to build versus buy an existing home.
How to Calculate Construction Loan Interest
Construction Loan Interest Formula
Construction loan interest is calculated on the outstanding drawn balance, not the full loan commitment:
Monthly Interest = Drawn Balance × (Annual Construction Rate ÷ 12)
Example: $150,000 drawn at 8.5%
Monthly interest = $150,000 × (0.085 ÷ 12) = $150,000 × 0.007083 = $1,063/month
Interest accrues daily in most construction loans, then is billed monthly. The calculation uses the average daily balance during the billing period — if you draw $60,000 on day 15 of month 1, you pay half a month’s interest on that draw in month 1.
Draw Schedule Interest Calculation — Step by Step
To calculate total construction interest manually:
Step 1: Determine the draw amount and timing for each milestone Step 2: Calculate monthly IO for each draw level Step 3: Multiply by the number of months at that draw level Step 4: Sum all monthly interest amounts
Example: $300,000 loan at 8.5%, 12-month build:
Foundation (20% = $60,000 × 2 months): $850 total
Framing (65% = $195,000 × 3 months): $4,153 total
Rough-In (65%→75% = avg. $225,000 × 2): $3,188 total
Drywall (75%→85% = avg. $255,000 × 2): $3,613 total
Completion (100% = $300,000 × 3 months): $6,375 total
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Total Construction Interest: $18,179
The draw schedule sliders in the calculator handle this automatically — adjust the milestone percentages to match your actual contract and the total construction interest updates instantly.
Construction to Permanent Loan Calculation
The construction-to-permanent loan calculation has two phases:
Phase 1 — Construction: Calculate IO payments per draw as shown above. Duration: 6–24 months depending on project complexity.
Phase 2 — Permanent: Apply the standard mortgage payment formula to the full loan balance at the permanent rate and term:
M = P × [r(1+r)^n] ÷ [(1+r)^n − 1]
Where:
P = loan balance at conversion (original loan + any rolled-in interest)
r = monthly permanent rate (annual rate ÷ 12)
n = months in permanent term (360 for 30-year)
Example: $300,000 at 7.0%, 30yr
Monthly P&I = $300,000 × [0.005833 × (1.005833)^360] ÷ [(1.005833)^360 − 1]
= $1,996/month
Enter your construction cost, land equity, and both rates in the calculator above to see both phase results instantly.
Land Equity Construction Loan Calculator
How Land Equity Reduces Your Down Payment
For most new construction, lenders require 20% down payment on the total project cost (land + construction + contingency). Land you already own counts dollar-for-dollar as equity toward this requirement.
Three land equity scenarios on a $400,000 project:
| Land Value (Owned) | Required 20% Down | Land Equity Credit | Cash Needed |
|---|---|---|---|
| $0 (buying land) | $80,000 | $0 | $80,000 |
| $40,000 | $80,000 | $40,000 | $40,000 |
| $80,000 | $80,000 | $80,000 | $0 |
| $100,000 | $80,000 | $80,000 | $0 + equity cushion |
When land equity covers the full 20% requirement, you may need zero cash down payment on the construction itself. This is the mechanism most first-time builder-buyers don’t know about — and why land value is the first input in the calculator.
Land Already in Loan — How It Counts
If you have an existing loan on the land (common for borrowers who purchased land on a lot loan before construction financing was arranged), the equity in the land — not the full value — counts toward your down payment credit.
Land value: $90,000
Existing lot loan balance: $45,000
Available land equity: $45,000 (counts toward down payment)
The lender typically requires the existing lot loan to be paid off at construction closing — rolled into the new construction loan. The net equity ($45,000) reduces your required cash contribution.
Construction Loan Rates 2026
Construction loan rates are typically higher than permanent mortgage rates because they carry more risk — the collateral (the home) doesn’t exist yet during the early draws, and construction projects can face cost overruns, contractor issues, or delays.
Bank vs Private/Hard Money Rates 2026
| Lender Type | Construction Rate Range | Notes |
|---|---|---|
| National / regional banks | 7.30%–9.25% | Stricter requirements, slower approval |
| Credit unions | 7.00%–8.50% | Often best rates for members |
| Private / hard money | 10.00%–14.00% | Fast approval, no/low documentation |
| USDA construction | 6.50%–7.50% | Rural areas, income limits apply |
| FHA construction (OTC) | 7.25%–8.00% | 3.5% down, post-build MIP |
| VA construction | 6.75%–8.00% | Veterans, no down payment |
For standard owner-occupied construction, bank or credit union financing at 7.3%–9.25% is the target. Hard money is used when conventional financing is unavailable — investment properties, non-standard builds, or when speed matters more than rate.
FHA Construction Loan Calculator
FHA offers a construction-to-permanent loan (called FHA OTC — One-Time Close) that combines the FHA purchase loan with construction financing. Key features:
- Down payment: 3.5% of total project cost (580+ credit)
- MIP: Required, same as FHA purchase loans — adds to monthly cost
- Credit minimum: 580 for 3.5% down
- Owner-occupied only: Primary residence builds
- Builder approval: Contractor must be FHA-approved
FHA construction is the accessible path for borrowers who lack the 20% down payment that conventional construction requires. The trade-off is MIP and stricter builder requirements.
For detailed FHA payment modeling including MIP calculation, see the FHA Mortgage Calculator.
VA Construction Loan Calculator
VA-eligible veterans can use their VA entitlement for construction-to-permanent financing. VA construction loans provide:
- No down payment (within VA entitlement limits)
- No PMI during construction or permanent phase
- Competitive rates (typically 6.75%–8.00% for construction)
- The VA funding fee applies (same as VA purchase loans)
- Builder must meet VA requirements
VA construction loans are available through a limited number of VA-approved lenders — not all VA lenders offer construction financing. Budget additional lead time to find a VA-construction-approved lender.
For complete VA payment modeling including funding fee, see the VA Mortgage Calculator.
Commercial Construction Loan Calculator
Commercial construction loans — for office buildings, retail, multifamily (5+ units), industrial — operate on fundamentally different underwriting than residential construction loans.
Key differences from residential construction:
| Feature | Residential Construction | Commercial Construction |
|---|---|---|
| Qualifying basis | Borrower income + credit | Project NOI + DSCR |
| Down payment | 10%–20% | 20%–35% |
| Rate | 7%–9% (bank) | 7%–10% (bank), 10%–14% (private) |
| Term | Convert to 15–30yr fixed | Convert to 5–25yr commercial |
| Amortisation | 30yr standard | 20–25yr amortisation, 5–10yr term |
| Recourse | Typically recourse to borrower | Varies — often non-recourse for institutional |
Commercial construction draw schedules follow the same milestone structure but with additional lender oversight — inspections at each draw stage, title continuation, and lien waiver requirements before each disbursement.
For commercial construction projects converting to permanent commercial financing, model the permanent phase using the Commercial Mortgage Calculator for DSCR, debt yield, and balloon payment analysis.
Real Construction Loan Scenarios With Actual Numbers
Scenario 1: Land Owner Building Custom Home (1-Time Close)
Elena owns a lot appraised at $85,000, fully paid off. She has a $420,000 construction contract. Her credit score is 730.
Land equity credit: $85,000. Total project cost: $420,000 + $42,000 contingency (10%) = $462,000. Required 20% down: $92,400. Land equity covers: $85,000. Cash needed: $7,400.
Construction loan: $462,000 − $85,000 − $7,400 = $369,600. Construction rate: 8.5%. Construction period: 14 months. Estimated construction interest: $32,000 (draws progress over 14 months). Permanent loan: $369,600 at 7.0%, 30 years = $2,460/month.
1-time close saves $8,000 vs 2-time close. Rate locked upfront prevents 2026 rate uncertainty.
Total true cost to build: $32,000 (construction interest) + $516,000 (30yr mortgage interest) + $8,000 (closing) = $925,600. Her total housing investment: $369,600 loan + construction cost + land = significantly more than buying comparable finished home. Verdict: Building justified if custom specification is the priority, not pure cost.
Scenario 2: Buying Land + Building (2-Time Close)
David is buying a $60,000 lot and building for $280,000. He’s a first-time builder and expects rates may fall as the Fed adjusts policy.
Total project cost: $60,000 + $280,000 + $28,000 contingency = $368,000. Required down (20%): $73,600. He has $75,000 cash — barely covers down with no land equity.
Construction rate: 8.0% (bank). Construction interest on progressive draws over 12 months: approximately $16,800. After completion, he shops for permanent financing — if rates fall 0.5%, he saves $63/month vs locking the 1-time close rate = $22,680 over 30 years.
2-time close extra cost: $8,000. Rate flexibility value if rates fall 0.5%: $22,680. Net advantage of 2-time close if rates fall: $14,680. Verdict: 2-time close justified only if he’s confident rates will fall at least 0.4% during construction. Otherwise, 1-time close saves money with certainty.
Scenario 3: Commercial Construction — Multifamily Build
Marcus is building a 12-unit apartment building. Total project cost: $1,800,000. Land owned: $200,000. Construction rate: 9.0%. Build period: 18 months.
Draw schedule (commercial): $360,000 (foundation/excavation), $450,000 (framing), $360,000 (MEP rough-in), $360,000 (drywall/interior), $270,000 (finishes/punch list).
Progressive construction interest over 18 months: approximately $110,000. Permanent loan: $1,600,000 at 6.8% (commercial), 25-year amortisation, 7-year term. Monthly P&I: $11,300. Annual debt service: $135,600. Required NOI at 1.25x DSCR: $169,500. At $1,400/month average rent × 12 units: $201,600 gross → $161,000 NOI at 80% occupancy. DSCR at 80% occupancy: 1.19x — tight.
Verdict: Feasible but margin-thin. Needs 84%+ occupancy to clear 1.25x DSCR for best rates. Model at Commercial Mortgage Calculator.
Should I Use 1-Time or 2-Time Close?
Choose 1-Time Close (Construction-to-Permanent) If:
Your build timeline is under 18 months. You want rate certainty — the 30-year permanent rate is locked before you break ground. Your financial situation is stable and unlikely to change significantly during construction. You want to minimise total closing costs — one closing saves approximately $8,000. You’re using FHA or VA financing — government loan construction programs are typically 1-time close by design.
Choose 2-Time Close (Stand-Alone Construction) If:
You have high confidence that interest rates will fall during your build period and want to capture the lower rate at permanent financing. Your project timeline exceeds 18–24 months and you want flexibility without a rate lock expiration. You’re a custom builder or developer who may sell the property on completion rather than hold it — no permanent loan needed. Your financial situation may improve significantly during construction (anticipated income increase, debt payoff), making better permanent terms available.
Frequently Asked Questions
How does a construction loan calculator work?
A construction loan calculator estimates interest during the build phase based on progressive draws across construction milestones, then calculates your permanent mortgage payment when the loan converts. Unlike a standard loan calculator, it uses two rates (construction rate and permanent take-out rate) and models interest only on drawn funds — not the full loan commitment — because construction loans disburse in stages as work is completed.
How is interest calculated on a construction loan?
Construction loan interest is calculated on the cumulative outstanding drawn balance, not the full loan amount. Monthly interest = (Total drawn × Annual rate) ÷ 12. In month one, you typically draw 20% for foundation — paying interest only on that 20%. Interest grows as subsequent draws are released. Total construction interest is significantly less than a simple rate × full balance calculation would suggest.
What is a construction-to-permanent loan?
A construction-to-permanent loan (C2P) combines the construction loan and permanent mortgage into a single closing. You lock your permanent rate upfront, pay interest-only during construction, and the loan automatically converts to a standard P&I mortgage when your certificate of occupancy is issued. One closing saves approximately $8,000 in fees versus a stand-alone construction loan followed by a separate refinance.
How does land equity work in a construction loan?
Land you own outright counts as equity toward the lender’s down payment requirement. If the lender requires 20% down on a $400,000 project and you own $80,000 worth of land, your land equity satisfies the full down payment requirement — potentially with no additional cash needed. Enter your land’s appraised value in the Land Value field; the calculator automatically credits it against your required down payment and adjusts your loan amount.
What is a contingency reserve in construction loans?
Contingency is a percentage (typically 5%–10%) of your construction budget held in reserve for cost overruns. Most lenders require contingency — construction projects rarely finish at exactly the original bid. The reserve is held by the lender and released only if actual costs exceed the original contract. Any unused contingency reduces your loan balance at conversion to the permanent mortgage.
What is the draw schedule on a construction loan?
The draw schedule is the plan for releasing loan funds as construction milestones are completed. Standard residential schedules have five draws: foundation (20%), framing (25%), rough-in plumbing and electrical (20%), drywall and interior (20%), and completion/finishes (15%). Lenders typically inspect the property before releasing each draw to confirm the prior milestone is complete. You pay interest only on amounts drawn, not the full commitment.
What are typical construction loan rates in 2026?
Bank and credit union construction loans run 7.3%–9.25% for residential construction in 2026. Private and hard money lenders charge 10%–14% for faster or less-documented approvals. FHA construction runs 7.25%–8.00%. VA construction runs 6.75%–8.00%. Commercial construction loans add 0.5%–2% above residential rates for equivalent borrower profiles. The construction rate is always higher than the permanent rate because the collateral (the finished home) doesn’t exist during the early construction phase.
What is an interest reserve on a construction loan?
An interest reserve is a portion of the loan set aside to cover interest payments during construction — so you don’t need to pay out of pocket each month. The lender holds the reserve and applies it to monthly interest charges automatically. This preserves your cash flow during the build but increases your loan balance at conversion (the interest has been added to principal). The calculator’s interest reserve toggle shows the difference in permanent loan balance between paying as you go versus financing the reserve.
Data source:
Federal Reserve H.8 construction loan rate data (2026), Fannie Mae and Freddie Mac construction loan guidelines, HUD FHA OTC (One-Time Close) program requirements, VA Lenders Handbook Chapter 7 (construction loans)
Disclaimer: Construction loan terms, rates, and draw schedules vary by lender, contractor, and project. Results are estimates only. Consult a construction loan lender for official qualification and terms.
Related Calculators
When your construction loan converts to permanent financing, model the complete mortgage payment — including property tax, insurance, and HOA — with the Mortgage Calculator. If you’re evaluating whether to refinance the construction loan into a better permanent rate after completion, the Mortgage Refinance Calculator calculates your break-even on refinance costs.
For commercial construction projects converting to permanent commercial financing, the Commercial Mortgage Calculator models DSCR, balloon payment, and loan type comparison. And to understand the interest-only payments during construction in the context of a broader loan comparison, the Loan Calculator handles any fixed-rate instalment structure.