How to use the construction loan draw interest calculator
- Enter the loan amount, the interest rate in your loan terms and the number of months of construction.
- List each draw by month number and amount. Several draws in one month are added together.
- Choose whether a draw is paid at the start or the middle of its month, and whether the interest is paid each month or added to the loan.
- Read the total interest, the highest monthly interest, the balance at the end and the month by month table.
Formula
interest for a month = balance used x annual rate / 12, rounded to the cent
balance used = balance after the draw for a draw at the start of the month, or balance before + half the draw for a mid-month draw
balance at the end of a month = balance before + draw (+ interest, if it is added to the loan)
Only the money drawn so far earns interest, so early months cost little and the last months cost the most. The tool uses twelve equal months, not actual days.
A $300,000 loan at an example 8% over twelve months
Five draws are taken: $60,000 in month 1, $80,000 in month 3, $70,000 in month 5, $60,000 in month 8 and $30,000 in month 11. The balance is $60,000 for two months, $140,000 for two, $210,000 for three, $270,000 for three and $300,000 for two. Monthly interest is $400.00, $933.33, $1,400.00, $1,800.00 and $2,000.00 for those stretches, and the total is $16,266.66.
If all $300,000 were drawn in month 1 the interest would be $2,000 x 12 = $24,000, so drawing in steps saves $7,733.34. Adding the interest to the loan instead of paying it raises the total to $16,725.98 and the balance at the end to $316,725.98. If every draw is paid mid-month the total is $15,266.67.
Why the interest is lower than on a normal loan
A construction loan pays out in stages as work is finished, and you pay interest only on what has been paid out. The amount you are approved for is a ceiling, not the balance. This makes the early payments small, but they rise quickly as the draws pile up, so plan cash for the last months.
When the build is done the loan usually turns into a longer loan. Compare that stage with the Mortgage Calculator, and see how a fixed payment of interest only compares with the Interest Only Loan Calculator. If you are buying an existing home instead, try the Assumable Mortgage Benefit Calculator.
What lenders may do differently
Many lenders count actual days, charge an inspection fee at each draw, hold back an interest reserve or limit how many draws you may take. Others fund a draw on a set day and not on the first of the month. This tool shows the idea with simple monthly interest, so use it to size the cost and then check the numbers in your own loan terms.
Assumptions and limits
- Interest is a simple annual rate divided by twelve, with each month rounded to the cent.
- A draw counts for the whole month when paid at the start, and for half of it when paid mid-month.
- The draws never go above the loan amount, and no fees, points or reserves are added.
- Rates shown on this page are examples. Enter the rate in your loan terms.
Frequently asked questions
What is an interest reserve?
It is an amount set aside in the loan to pay the interest during construction. When interest is added to the balance, as in the second choice here, you can see how a reserve increases what you owe.
Can I use this for a renovation loan?
Yes, if the loan pays out in draws and charges interest on the drawn balance. If the lender charges interest on the full amount from the start, enter one draw in month 1.
Why does the balance at the end exceed the loan amount?
When interest is added to the loan, the balance includes the interest. The tool does not stop you, so check that your loan allows interest to be added on top of the commitment.
How many months can I enter?
Up to 60 months of construction and up to 36 draw lines. A draw that falls after the last month is rejected so that no money goes unmatched.