Construction loan interest calculator

Monthly, on the amount drawn so far, not on the full loan. Each month the lender charges the yearly rate divided by 12 on the outstanding balance. The balance grows as draws fund the work, so interest is small early in the build and largest after the last draw.

No, only on what has been drawn. In the example above, the average balance over the term is 68.4% of the loan, which is why the interest comes to $1,154,301 rather than the $1,687,500 you get from rate times loan times term.

Often, through an interest reserve: part of the loan is set aside to pay its own interest, so the borrower pays nothing in cash during construction. When interest is added to the loan it compounds, because next month's interest is charged on this month's interest too. Some loans require interest to be paid monthly instead.

Use the contractor's schedule of values or the pro forma's cost curve if you have one. An S-curve, slow at the start, heaviest mid-build and slow at the end, is closer to how most construction spending runs than an even split. It barely moves the total: both put the average draw in the same month, so with interest paid monthly they cost the same, and with interest added to the loan the S-curve comes out $3,535 lower in the example. What it changes is when the interest falls: less in the first half of the build, more in the second.

Divide the yearly rate by 12 and multiply by the balance drawn at the start of the month. At 7.5%, that is 0.625% a month, so a $5,000,000 balance costs $31,250 in interest that month.

Some can: a construction-to-permanent loan turns into a long-term mortgage once the building is finished. Otherwise the construction loan is repaid from a sale or by a separate permanent loan. Either way, interest during construction is charged on the drawn balance, as calculated here.

During construction most loans are interest only. With interest paid each month, the monthly table above is the payment schedule: it starts near zero and rises with every draw. The principal is repaid from the sale or a permanent loan.