Construction Loan Interest Calculator
Estimate the interest you pay during a construction loan’s draw period — from an average drawn balance, even monthly draws or your own draw schedule — with loan and inspection fees, an interest-reserve option, a month-by-month schedule and the payment after the loan converts to a mortgage.
How it works
Average-balance method: total interest ≈ loan × average drawn % × (rate ÷ 12) × months · Draw schedule: each month, interest = (rate ÷ 12) × (balance already drawn + the share of the new draw outstanding that month), summed over the build · Even mid-month draws give loan × (rate ÷ 12) × months ÷ 2 · Interest reserve: each month’s interest is added to the balance
During construction a lender releases money in stages (draws) as work is completed, and you pay interest only on what has been advanced so far — not the whole loan. Because the drawn balance climbs from near zero to the full amount over the build, the average outstanding balance is roughly half the loan when draws are evenly paced. The quick method multiplies that average by the monthly rate and the number of months. For a closer figure, choose even monthly draws (with an optional amount paid out at closing, such as the land) or type in your lender’s draw schedule; the calculator then charges interest month by month on the balance drawn so far, and on part of each new draw depending on when in the month it is paid out. Under More options you can add loan fees and per-draw inspection fees, see what happens with an interest reserve (the lender pays the interest from the loan, so it compounds), and get the monthly payment once the loan converts to a regular mortgage.
Worked example
A $300,000 build at 8% over 12 months, drawing funds evenly, averages about $150,000 outstanding. Interest is roughly $150,000 × (0.08 ÷ 12) × 12 = $12,000 for the year, averaging about $1,000 a month — rising from near zero at the start to $2,000 in the final, fully drawn month. If 20% ($60,000) is paid out at closing for the land and the rest is drawn at the start of each month, interest rises to $15,200. Converting the $300,000 into a 30-year mortgage at 7.4% then costs about $2,077 a month in principal and interest.
Sources: Federal Reserve H.15 — bank prime loan rate · Freddie Mac — Primary Mortgage Market Survey
Frequently asked questions
Why isn't interest charged on the whole loan?
Construction funds are released in draws as milestones are met, so early on only a fraction of the loan has been advanced. You pay interest only on the outstanding drawn balance, which is why the average balance — not the full loan — drives the cost.
Why use 50% as the average balance?
If draws are spread evenly from the start of the build to completion, the outstanding balance rises roughly linearly from zero to the full amount, averaging about half. Front-loaded draws, such as paying for the land at closing, push the average higher; back-loaded draws push it lower. Use “My draw schedule” to enter your lender’s actual draws.
What is an interest reserve?
Some construction loans set aside part of the loan to pay the interest during the build, so you make no monthly payments. The catch is that the interest is borrowed too, so it earns interest itself and raises the balance you carry into the mortgage. Turn on the interest reserve under More options to see the difference.
What happens after construction?
The loan typically converts to a standard amortizing mortgage (a construction-to-permanent loan) or is refinanced into one. From that point you make principal-and-interest payments on the full balance rather than interest-only payments on draws. The calculator shows that payment at the rate and term you enter.
What fees come with a construction loan?
Besides interest, expect origination and closing fees (often around 1% of the loan) and an inspection fee each time the lender checks the work before releasing a draw. Enter them under More options to see the total cost of financing the build.
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Educational estimate only — not financial, tax or lending advice. Confirm exact figures with your lender.