Why does my construction loan payment go up every month?

Because you pay interest only on the money that has actually been drawn, and the drawn balance grows with each release. A $392,000 loan at 8.5% costs about $638 a month when only the $90,000 land draw is out and about $2,777 a month once it is fully drawn.

How much down payment do I need for a construction loan?

Typically 10 to 20% of total project cost, and lenders count land you already own toward it at its appraised value. On top of that you need the contingency in cash — most want 5 to 10% of the build budget sitting outside the loan.

What is a draw schedule?

A list of construction milestones and the share of the budget released at each. Five to eight draws is normal, each one triggered by an inspection confirming the work is in place, with three to ten business days from request to funding.

Is a one-time-close loan better than two separate loans?

Usually yes. One closing means one set of costs, one appraisal, and a rate for the permanent phase that is locked or capped up front. A two-close structure requalifies you at completion, at whatever rates exist then, and adds another 2 to 3% in closing costs.

Does the loan cover change orders?

Rarely. The facility was sized on the original contract, so anything you add during the build usually comes out of your own pocket. That is precisely what the contingency is for.

Can I make principal payments during construction?

Most lenders allow it, but there is little point — anything you pay down simply reduces the balance you are charged interest on, and you will need the facility to complete the house anyway. Cash is better held as contingency until the job is closed out.

Construction Loan Calculator

Enter your land cost, build budget, rate and construction period to see how the interest-only payment climbs as each draw releases. It also returns the total interest paid during construction and the permanent mortgage payment after the loan converts.

Land cost($)

Enter 0 if you already own the lot free and clear.

Construction budget (hard costs)($)

The builder's contract price — this is what the draws pay out against.

Loan amount($)

Total facility. Anything above it is cash you bring to closing.

Construction interest rate(% APR)

Usually prime plus a margin, and usually variable.

Construction period(months)

Draw schedule shape

Permanent loan rate(% APR)

Permanent loan term(years)

Contingency you hold outside the loan(% of budget)

Most lenders want to see 5–10% in cash that is not part of the facility.

Total construction interest

$19,415

12 months at 8.500% on the drawn balance

First month's interest paymentinterest on the land draw only: $638
Final month's interest paymentthe whole facility is drawn by then — plan cash flow around this figure: $2,598
Average monthly payment during construction: $1,618
Permanent loan payment (P&I)$392,000 over 30 years at 6.750%: $2,543
Total cost of borrowingconstruction interest, origination, inspections and all permanent-loan interest: $547,837
Lender fees during construction1.00% origination plus 6 inspections at $200: $5,120
Contingency you should hold8.0% of the build budget, in cash and outside the loan: $32,000
Cash needed at and after closingthe gap between total project cost and the loan, plus contingency and origination: $133,920

What this figure includes

This models a construction-to-permanent loan with monthly interest-only payments on the drawn balance during the build, converting to a fully amortising mortgage at the end. It assumes a fixed construction rate — most are variable and tied to prime — and it does not include property taxes, hazard or builder's risk insurance, title and closing costs, permit fees, HOA charges, or any interest reserve the lender may capitalise into the loan. Draw timing is modelled as a smooth curve; real draws are lumpy and depend on inspections.

How this is calculated

What makes a construction loan different

An ordinary mortgage hands you the whole sum on day one and you pay the same amount every month for thirty years. A construction loan does neither. The lender approves a facility — a maximum — and then releases it in pieces as the house gets built. You pay interest only, and only on what has actually been released.

That is the mechanic that catches borrowers out. Your first payment is small, sometimes startlingly small, because only the land draw is outstanding. By the final month you are paying interest on the entire balance, and that payment can be four or five times the first one. People budget for the first number and get ambushed by the last.

Monthly interest = outstanding drawn balance × (annual rate ÷ 12)

Run it: a $392,000 facility at 8.5% with $90,000 drawn for land costs $638 in month one. Fully drawn, the same loan costs $2,777 a month. That is the ramp. If you are also paying rent or an existing mortgage while you build, the last four months are the squeeze, and they arrive exactly when the builder is asking for the biggest draws.

The draw schedule

Draws are tied to completed stages, not to the calendar. A typical residential schedule runs five to eight draws:

Land or lot acquisition, at closing
Foundation and slab complete
Framing and roof dried in
Mechanical, electrical and plumbing rough-in, inspected
Insulation, drywall and exterior complete
Cabinets, trim and interior finishes
Final — certificate of occupancy issued

The shape matters for your interest bill. A front-loaded schedule — expensive lot, slab and frame early — puts most of the balance out early and accrues more interest than a back-loaded one on the same total. Choosing "back-loaded" in this calculator can cut total construction interest by 15 to 25% against the front-loaded case, which is worth knowing before you negotiate the schedule with your builder.

Inspections, and why draws are late

Before each draw the lender sends an inspector to confirm the work claimed is actually in place. That costs $150 to $300 a visit, billed to you, and it takes time — usually three to ten business days from the builder's request to money in the account. Builders and subcontractors expect to be paid on their terms, not the bank's, so someone floats the gap. On a well-run job the builder floats it. On a thin job, you do.

Ask two questions before you sign: how many business days from draw request to funding, and does the lender fund materials that are on site but not yet installed? A "no" to the second means you are cash-funding every deposit on windows, cabinets and appliances, which is real money and long lead times.

Contingency is not optional

Almost every lender wants the borrower carrying a contingency of 5 to 10% of the hard-cost budget, in cash, outside the loan. This is not the lender being cautious for your benefit. It is the lender making sure that when the excavator hits rock, or the framing lumber quote expires, or the county requires an engineered retaining wall nobody drew, the job does not stop with a half-finished building as their collateral.

Treat 10% as the floor on a custom build and 15% if you are renovating or building on a site you have not had geotechnically tested. Change orders during construction are almost never funded by the loan — the facility was sized on the original contract, and increasing it means re-underwriting the whole file.

Conversion to the permanent loan

A construction-to-permanent (one-time-close) loan converts automatically at completion: one set of closing costs, one appraisal, and the rate for the permanent phase is usually locked or capped at the start. A two-close structure means a separate mortgage at the end, a second set of closing costs of 2 to 3%, and full requalification at whatever rates exist that month. One-time-close costs slightly more in rate and is worth it for the certainty on almost every build.

The permanent payment is the ordinary amortisation formula on the final balance:

Payment = P × i ÷ (1 − (1 + i)^−n)

where i is the monthly rate and n is the number of months. That is the number you will live with for decades, so it deserves more attention than the construction rate that applies for one year.

What underwriting actually looks at

The appraisal is done on plans and specifications — the as-completed value — and the loan is sized against the lower of that value or total cost, typically at 80 to 90% loan-to-cost. Lenders also want a licensed builder with a track record, a fixed-price contract rather than cost-plus, and evidence you can carry both the interest payments and your existing housing cost through the build. Owner-builders face materially tighter terms and many lenders will not write them at all.

Cost figures last reviewed 9 Sept 2026 · Typical US residential construction-to-permanent loan terms: origination around 1% of the loan, per-draw inspection fees of $150-$300, five to eight draws over a build, and a borrower-held contingency of 5-10% outside the loan.

Frequently asked questions

Why does my construction loan payment go up every month?: Because you pay interest only on the money that has actually been drawn, and the drawn balance grows with each release. A $392,000 loan at 8.5% costs about $638 a month when only the $90,000 land draw is out and about $2,777 a month once it is fully drawn.
How much down payment do I need for a construction loan?: Typically 10 to 20% of total project cost, and lenders count land you already own toward it at its appraised value. On top of that you need the contingency in cash — most want 5 to 10% of the build budget sitting outside the loan.
What is a draw schedule?: A list of construction milestones and the share of the budget released at each. Five to eight draws is normal, each one triggered by an inspection confirming the work is in place, with three to ten business days from request to funding.
Is a one-time-close loan better than two separate loans?: Usually yes. One closing means one set of costs, one appraisal, and a rate for the permanent phase that is locked or capped up front. A two-close structure requalifies you at completion, at whatever rates exist then, and adds another 2 to 3% in closing costs.
Does the loan cover change orders?: Rarely. The facility was sized on the original contract, so anything you add during the build usually comes out of your own pocket. That is precisely what the contingency is for.
Can I make principal payments during construction?: Most lenders allow it, but there is little point — anything you pay down simply reduces the balance you are charged interest on, and you will need the facility to complete the house anyway. Cash is better held as contingency until the job is closed out.