Building a custom home finances itself very differently from buying an existing one. Instead of one mortgage at closing, you borrow money in stages during construction — paying interest only on what has actually been disbursed — and then, once the house is finished, the loan converts into a standard permanent mortgage. This construction loan calculator models both phases: the interest-only draw period on the front end, and the converted amortizing permanent payment on the back end.
Because the two phases carry different rates and payment structures, people often underestimate what they will actually pay each month. Run your own numbers below, then read through how the draws, the conversion, and the math work before you talk to a lender.
How to Use
- Enter the Total Construction Cost — the fixed-price contract or builder estimate to complete the home, including permits, labor, and materials.
- Set the Number of Draw Stages. Builders typically request draws at milestones such as slab, framing, rough-in, drywall, and finish; 5 stages is the industry default.
- Type the Construction Interest Rate — the annual, interest-only rate charged during the build. Expect it to sit roughly 0.5–1.0 percentage points above today's permanent mortgage rates.
- Set the Construction Period in months. A typical single-family build takes 9–12 months; a large custom home can take 18 or more.
- Enter your expected Permanent Mortgage Rate — the rate the loan converts to at completion. If you have not locked it, test a range of ±0.5% to stress your budget.
- Choose the Permanent Loan Term — 30 years is standard, but a 15-year term builds equity much faster.
The result card shows your monthly interest-only payment during construction, the total interest paid while building, the converted permanent principal-and-interest payment, and the total interest across the entire life of the loan.
How the Math Works
During construction, the lender does not hand you the full build cost up front. It releases funds at agreed milestones — called draws — and you pay interest only on the balance actually outstanding. Because draws happen gradually, the average balance during the build is roughly half the total construction cost (the balance ramps from zero to the full amount over the construction period). That gives:
Monthly construction interest = (Build Cost ÷ 2) × (Construction Rate ÷ 12)
Once the certificate of occupancy issues, the loan converts to a permanent mortgage on the disbursed build cost, amortized with the standard PMT formula used by Fannie Mae and every major lender:
M = P × r(1 + r)ⁿ / ((1 + r)ⁿ − 1)
Where P is the build cost, r is the monthly permanent rate, and n is the number of monthly payments (term in years × 12). If either rate is 0%, the engine simply divides the principal evenly across the months rather than dividing by zero.
Examples
Example 1 — The standard $400,000 build. A family builds a $400,000 home in 5 draw stages over 12 months at an 8.0% construction rate, converting to a 7.0% 30-year permanent mortgage. The average drawn balance is $200,000, so during construction the monthly interest-only payment is about $1,333, totaling roughly $16,000 over the build. After conversion, the permanent P&I payment is about $2,661 per month, with total permanent interest near $558,036. Notice that during construction you are paying roughly half of what the eventual mortgage will cost — plan for both.
Example 2 — A large $1.5M custom home. A $1,500,000 build with 6 draws over 18 months at 8.5% construction rate, converting to 6.5% over 30 years. The construction interest-only payment is about $5,313 per month, totaling roughly $95,625 during the build. The converted permanent payment lands near $9,481 per month. High-value builds carry correspondingly large draw-period carrying costs, so contingency reserves matter.
Example 3 — Choosing a 15-year permanent term. On the same $400,000 build at 8.0% for 12 months, converting to a 7.0% 15-year mortgage instead of 30 years: the permanent payment jumps to about $3,595 per month, but total permanent interest drops from roughly $558,000 to about $247,000 — saving more than $310,000 over the life of the loan.
FAQ
How does a construction-to-permanent loan work?
The lender disburses funds in stages (draws) as construction milestones are completed. During the build you pay interest only on the outstanding balance. When the home passes final inspection and you receive the certificate of occupancy, the loan converts — often automatically — into a standard permanent amortizing mortgage on the disbursed build cost. This single-close structure avoids paying two separate sets of closing costs.
How are construction loan draws calculated?
Draws are scheduled against milestones written into your builder's contract, most commonly four to seven stages such as foundation/slab, framing, rough-in (plumbing/electrical/HVAC), drywall, and finish. The lender sends an inspector to verify each stage before releasing funds. For estimation, this calculator assumes equal draws spread evenly across the construction period, so the average outstanding balance equals half the total build cost.
Is the construction loan payment interest-only?
Yes, almost universally. During the build, no principal is being repaid; you owe interest on whatever has been drawn so far, either paid monthly out of pocket or, in many single-close loans, rolled into the loan balance. This calculator assumes interest is paid monthly on the average drawn balance.
What happens when construction is finished?
The loan converts to a permanent mortgage. Depending on your program, the permanent rate was either locked at closing (a single-close construction-to-perm loan) or is set at conversion (a two-close construction loan followed by a separate end mortgage). The converted principal is the amount disbursed to the builder, and payments then amortize over the chosen term — typically 30 years.
What credit score and down payment do construction loans require?
Construction loans are considered riskier than purchase mortgages because the collateral does not yet exist, so lenders generally ask for stronger credit scores (often 680+) and larger down payments — commonly 20–25% of the total project cost. Expect to show detailed builder plans, a fixed-price contract, and licensed-builder documentation.
How much more expensive is building vs. buying existing?
Beyond the construction contract itself, you pay temporary loan fees, inspection fees, and a higher interest rate during the build, plus you carry the interest-only payment for months before you can move in. This calculator's construction-period interest line — about $16,000 on a typical 12-month $400,000 build — is the number buyers most often forget to budget.
Disclaimer
This construction loan calculator is provided for informational purposes only and does not constitute financial, lending, or tax advice. Estimates assume equal draw stages and an average outstanding balance equal to half the build cost; actual draw schedules, rates, reserve requirements, and conversion terms vary by lender, region, credit profile, and program. Always confirm your specific terms, rates, and closing costs directly with a licensed construction-loan lender before committing.