Construction Loan Calculator

How Construction Loans Work

A construction loan is a short-term financing product used to fund the building of a new home, major renovation, or commercial real estate project. Unlike a traditional mortgage where you receive the full loan amount at closing, a construction loan disburses funds incrementally as the project progresses through stages called “draws.” This structure protects the lender by ensuring that money is only released as construction milestones are completed and verified.

During the construction phase, which typically lasts 6 to 18 months, you make interest-only payments on the amount that has been drawn down. For example, if your total construction loan is $350,000 but only $100,000 has been disbursed for the foundation and framing, you pay interest only on that $100,000. As the builder completes additional stages (electrical, plumbing, roofing, interior finishing), more funds are released and your interest payments increase accordingly.

Once construction is complete and the home passes final inspection, the loan either converts to a permanent mortgage (in the case of a construction-to-permanent loan) or must be paid off entirely (in the case of a standalone construction loan). The permanent mortgage phase works like any traditional home loan, with fixed monthly payments of principal and interest over 15 to 30 years. Our calculator above models both phases, showing you the interest-only payments during construction and the fully amortized payments during the permanent mortgage phase.

Types of Construction Loans

There are several types of construction loans, each designed for different situations. Understanding which type fits your project is essential for managing costs and avoiding complications.

Construction-to-permanent loans (also called single-close or one-time-close loans) combine the construction loan and permanent mortgage into a single product. You apply once, close once, and pay one set of closing costs. When construction is finished, the loan automatically converts to a permanent mortgage at a predetermined rate and term. This is the most popular option for homeowners building a primary residence because it simplifies the process and reduces total closing costs.

Standalone construction loans (also called two-close loans) cover only the construction phase. Once the home is built, you must obtain a separate mortgage to pay off the construction loan. This approach involves two applications, two closings, and two sets of closing costs, making it more expensive. However, it allows you to shop for the best permanent mortgage rate independently after construction is complete, which can be advantageous if rates are expected to drop.

Owner-builder construction loans are designed for borrowers who act as their own general contractor. These are more difficult to obtain because lenders view owner-builders as higher risk. You typically need to demonstrate significant construction experience or trade expertise, and lenders may impose additional oversight requirements. Not all lenders offer owner-builder loans.

Renovation construction loans are used for major renovations or additions to existing properties. These loans fund both the purchase of the property (or refinance of an existing mortgage) and the renovation costs. The FHA 203(k) loan is a well-known government-backed renovation loan program. Conventional renovation loan products are also available through many lenders.

Construction Loan Rates and Terms

Construction loan interest rates are typically 1% to 2% higher than standard mortgage rates because of the additional risk involved. As of early 2026, construction loan rates generally range from 7% to 10% for the construction phase, with the permanent mortgage phase rates in line with prevailing market mortgage rates.

Construction phase rates are usually variable, meaning they can fluctuate during the building period. The rate is commonly tied to the prime rate or another benchmark plus a margin. For example, a lender might offer prime plus 1%, which would adjust whenever the Federal Reserve changes the federal funds rate. Since the construction phase is relatively short (6 to 18 months), most borrowers accept the variable rate for this period.

Permanent phase rates can be fixed or adjustable, just like a standard mortgage. Most borrowers prefer a fixed rate for the permanent phase to lock in predictable monthly payments for 15 to 30 years. If you choose a construction-to-permanent loan, the permanent rate is typically set at the time you close the construction loan, providing certainty about your long-term costs.

Loan terms for the construction phase typically range from 6 to 18 months, depending on the project scope. Extensions are possible but usually come with additional fees and may require re-approval. The permanent mortgage phase follows standard terms of 15 or 30 years. Use our calculator to model different rate scenarios and see how they affect your total cost across both phases.

Construction Loan Requirements

Construction loans have stricter qualification requirements than standard mortgages because the lender is financing a property that does not yet exist. Here are the typical requirements:

Higher down payment. Most construction loans require a down payment of 20% to 25% of the total project cost (land plus construction). Some lenders may accept 15% for well-qualified borrowers, but construction loans with less than 20% down are rare. If you already own the land, its value can often count toward your down payment.

Strong credit score. Lenders typically require a minimum credit score of 680 to 700 for construction loans, with the best rates reserved for scores above 740. Because construction loans involve more risk and larger amounts, credit requirements are stricter than for a standard home purchase.

Detailed construction plans. You must provide complete architectural plans, building specifications, and a detailed cost breakdown. The lender will review these documents carefully and may require modifications before approving the loan. Vague or incomplete plans are a common reason for construction loan denial.

Licensed, insured contractor. Unless you qualify for an owner-builder loan, you must hire a licensed general contractor. The lender will review the contractor's credentials, experience, references, and insurance coverage. The contractor must carry general liability insurance and workers' compensation coverage at minimum.

Appraisal of the completed project. The lender will order an appraisal based on the plans and specifications to determine the projected value of the finished home. The loan amount is based on this appraised value, so it is important that your plans reflect realistic construction costs and market values for your area.

Reserves. Many lenders require that you have 6 to 12 months of reserves (mortgage payments saved in liquid accounts) after closing. This ensures you can handle unexpected construction delays or cost overruns without defaulting on the loan.

Construction Loan vs. Traditional Mortgage

Understanding the key differences between a construction loan and a traditional mortgage helps you plan and budget more effectively:

Disbursement. A traditional mortgage provides the full loan amount at closing. A construction loan releases funds incrementally through the draw process, with each draw tied to a completed construction milestone. The lender typically sends an inspector to verify the work before approving each draw.

Payment structure. Traditional mortgages have fixed monthly payments of principal and interest from the first month. Construction loans start with interest-only payments that increase as more money is drawn, then convert to regular principal-and-interest payments after construction is complete.

Interest rates. Construction loan rates are higher during the construction phase due to the increased risk. Once the loan converts to a permanent mortgage, the rate is typically comparable to market mortgage rates. The CFPB recommends comparing the total cost across both phases, not just the permanent mortgage rate, when evaluating construction loan offers.

Down payment. Traditional mortgages can require as little as 3% to 5% down for qualified borrowers (or 0% for VA and USDA loans). Construction loans typically require 20% to 25% down, making the upfront cash requirement significantly higher.

Qualification difficulty. Construction loans have stricter credit, income, and documentation requirements. The approval process is longer and more involved because the lender must evaluate the project itself, not just the borrower.

Timeline and complexity. A traditional home purchase can close in 30 to 45 days. A construction loan involves plan approval, contractor vetting, draw schedules, inspections, and potential delays due to weather, supply shortages, or permitting issues. Expect the entire process from application to move-in to take 8 to 18 months.

How to Apply for a Construction Loan

The construction loan application process is more involved than a standard mortgage. Here is a step-by-step guide to help you prepare:

Step 1: Get your finances in order. Review your credit report and address any issues. Save for the larger down payment required. Calculate your debt-to-income ratio to ensure it is within lender guidelines, typically below 43% to 45%.

Step 2: Develop your construction plans. Work with an architect or home designer to create complete plans and specifications. Get detailed bids from licensed contractors. Prepare a realistic budget that includes a 10% to 15% contingency for unexpected costs.

Step 3: Choose the right lender. Not all banks and credit unions offer construction loans. Seek out lenders with specific construction lending expertise. Community banks and credit unions that serve your local area are often the best sources, as they understand local construction costs and market values. Get quotes from at least three lenders.

Step 4: Get pre-qualified. Provide the lender with your financial information, construction plans, and contractor details for a preliminary review. Pre-qualification gives you an estimate of how much you can borrow and at what rate, allowing you to refine your plans and budget before committing.

Step 5: Submit the formal application. Once you are ready, submit the full application with all required documentation, including tax returns, pay stubs, bank statements, construction plans, contractor bids, and the land purchase agreement or proof of land ownership.

Step 6: Appraisal and underwriting. The lender orders an appraisal of the completed project based on your plans. Underwriters review your financial profile, the project feasibility, and the contractor's qualifications. This process typically takes 30 to 60 days.

Step 7: Closing and construction. Once approved, you close on the construction loan and construction begins. Monitor the draw schedule closely and stay in regular communication with both your contractor and lender throughout the build process.

Construction Loan Calculator: How to Use

Our free construction loan calculator models both the construction phase and the permanent mortgage phase, giving you a complete picture of your building project's financing costs. Here is how to use it:

Enter the construction cost. This is the total cost of building the home, including materials, labor, and contractor fees. Use the detailed bid from your contractor as the basis for this number. Add a contingency of 10% to 15% if your plans are not yet finalized.

Enter the land cost. If you are purchasing land as part of the project, enter its cost here. If you already own the land, you may enter zero, though your lender may credit the land value toward your down payment.

Enter your down payment. This is the cash you will contribute at closing, typically 20% to 25% of the total project cost (construction plus land).

Set the construction loan rate. Enter the interest rate for the construction phase. This is typically 1% to 2% higher than prevailing mortgage rates. If you have a rate quote from a lender, use that number.

Set the construction period. Enter the expected duration of construction in months. Most custom homes take 8 to 14 months to build, depending on size and complexity.

Set the permanent mortgage rate and term. Enter the interest rate and term for the permanent mortgage that begins after construction is complete. For construction-to-permanent loans, this rate may be locked at the time of initial closing.

The calculator displays the interest-only payments during construction (including the increasing draw schedule), the monthly payment for the permanent mortgage, and the total cost across both phases. Review the draw schedule table to understand how your payments increase during construction. For tips on paying off the permanent mortgage faster, visit our loan payoff calculator.