Direct Answer
Construction loans fund builds in draws at rates often 0.5%-1.5% above permanent mortgages - roughly $4,000+ extra interest on a $400,000 twelve-month build. Traditional mortgages fund completed homes at lower long-term rates with one closing.
Use the Mortgage Calculator to model permanent payment after build completion.
Last verified on: June 28, 2026
Editorial note: This guide is for educational planning only - not legal, tax, lending, or medical advice. Verify figures with official sources and qualified professionals before making decisions.
Research method: Daily Calcs reviewed primary government, regulatory, and industry sources and modeled calculator scenarios on June 28, 2026.
Construction Loan vs Mortgage
Swipe to see all columns →
| Factor | Construction loan | Traditional mortgage |
|---|---|---|
| Rate | +0.5% to +1.5% vs permanent | Market 30-year fixed |
| Payments during build | Interest-only on draws | Full P&I from day one |
| Timeline | 9-18 months | 30-45 day close |
| Down payment | Often 20%-25% of project | 3%-20% of purchase |
$400,000 Build - Interest During Construction
Swipe to see all columns →
| Month | Avg. balance drawn | Interest at 7.5% |
|---|---|---|
| 1-3 | $80,000 | ~$500/mo |
| 4-6 | $200,000 | ~$1,250/mo |
| 7-12 | $320,000 | ~$2,000/mo |
Construction Loan Phases Explained
During the build, you pay interest only on disbursed amounts - not the full loan amount from day one. The lender releases funds in draws after inspection confirms completed work.
Construction-to-permanent (one-close) converts to a standard mortgage when the certificate of occupancy is issued - avoiding a second full closing.
Worked Example: $400,000 Total Project, 12-Month Build
Swipe to see all columns →
| Phase | Drawn balance | Rate | Monthly interest |
|---|---|---|---|
| Months 1-3 | $80,000 avg | 7.5% | ~$500 |
| Months 4-6 | $200,000 avg | 7.5% | ~$1,250 |
| Months 7-12 | $320,000 avg | 7.5% | ~$2,000 |
| Total construction interest | ~$18,000-$22,000 |
Permanent mortgage at 6.5% on $400,000: P&I ≈ $2,528/month for 30 years.
Build vs Buy Existing: Total Cost Comparison
Swipe to see all columns →
| Factor | New build | Existing $400k resale |
|---|---|---|
| Timeline | 12-18 months | 30-45 days |
| Construction interest | $18,000+ | $0 |
| Customization | High | Limited |
| Builder markup | 10%-20% | N/A |
| Immediate move-in | No | Yes |
What to Do Next
- Budget construction interest separately from permanent PITI (Principal, Interest, Taxes, and Insurance).
- Compare one-close vs two-close closing cost totals.
- Hold 10% to 15% contingency for overruns.
- Model permanent payment in Mortgage Calculator after build.
- Get lender draw schedule before signing builder contract.
Construction Loan Checklist
- 20%-25% down on total project cost
- Builder contract with draw milestones
- Construction interest budget (12-18 months)
- One-close vs two-close comparison completed
- Permanent rate quote for conversion locked
Common Mistakes When Building
Underestimating construction interest during 12 to 18 month builds - carrying $320,000 average balance at 7.5% costs ~$2,000/month in interest alone at peak draws. Another error is 10% builder contingency when custom projects routinely overrun 15%.
Choosing two-close loans without comparing $5,000 to $15,000 duplicate closing costs against rate shopping benefits.
Assumptions and Limitations
Draw schedules depend on builder milestones and lender inspection timing - delays extend interest-only costs. Appraised value at completion may differ from project cost, affecting permanent loan-to-value (LTV) ratio.
Cost comparisons to resale homes ignore land value you already own. Local permit, impact fee, and utility hookup costs vary widely and are not modeled in standard mortgage calculators.
What This Means for Your Personal Numbers
Construction interest adds up faster than you expect. On a $400,000 build, peak draws mean $2,000+ per month in interest alone before you ever move in. Budget for 12 to 18 months of interest-only payments, not the builder’s optimistic timeline. Hold a 15% contingency for overruns - change orders and material delays are the norm, not the exception. And compare one-close vs two-close closing costs upfront; the second closing can cost $5,000 to $15,000 in duplicate fees.
Calculator Methodology
The Mortgage Calculator computes P&I from loan amount, rate, and term - use it for the permanent phase after construction converts.
Assumptions: Fixed-rate fully amortizing loan after certificate of occupancy.
Limitations: Construction-phase interest-only costs are not modeled - budget separately.
How to stress-test your result
Run a best case and worst case input side by side. Add 0.25% to rate or 10% to tax and insurance. If the result breaks your budget at the worst case, adjust your assumptions before committing.
Related Reading
- Closing Costs Explained (2026) - one-close vs two-close fees
- 30-Year vs 15-Year Mortgage - permanent loan term choice
- Mortgage Calculator - post-build payment estimate
Official and Supporting Sources
- Consumer Financial Protection Bureau (CFPB): Construction loans
- HUD: Federal Housing Administration (FHA) construction programs
Next Step
Model your permanent loan payment with the Mortgage Calculator after your build budget is set.
Frequently Asked Questions
What is the difference between a construction loan and a mortgage?
A construction loan funds building in stages through draws as work completes - you pay interest only on amounts disbursed during the build. A traditional mortgage funds a completed home purchase with full principal and interest from closing. Construction-to-permanent loans combine both: construction phase then automatic conversion to a permanent mortgage when the builder finishes and the certificate of occupancy is issued.
Are construction loan rates higher than mortgage rates?
Yes - construction loans typically run 0.5% to 1.5% above standard 30-year fixed rates because the lender carries higher risk during the build. On a $400,000 project, a 7.5% construction rate versus 6.5% permanent rate adds roughly $4,000 in extra interest during a 12-month build on average drawn balances. Shop lenders specializing in construction - big banks and local credit unions differ widely.
How do construction loan draws work?
The lender inspects completed work before each draw - foundation, framing, drywall, final. Typical schedules release 10% to 20% per milestone. You or the builder submits draw requests; inspection confirms work before funds release. Interest accrues only on disbursed amounts. Budget 12 to 18 months for custom builds; delays extend interest-only costs.
Construction loan vs buying an existing home: Which costs less?
Existing homes avoid construction interest, builder overhead (10% to 20%), and land development costs. New construction offers customization but total cost often runs 15% to 30% above comparable resale in the same area when you include land, permits, and upgrades. Existing homes close in 30 to 45 days; new builds take 9 to 18 months with carrying costs during construction.
Construction-to-permanent vs two-close loan: Which is cheaper?
One-close construction-to-permanent saves a second set of closing costs ($5,000 to $15,000) and one appraisal. Two-close loans - separate construction loan then refinance to permanent - offer more lender choice but double closing costs and rate risk at conversion. One-close fits most owner-occupied custom builds; two-close may help investors or non-standard projects.
What down payment does a construction loan require?
Most construction lenders want 20% to 25% down on total project cost (land plus build). FHA one-time-close programs allow lower down for eligible borrowers. Down payment applies to completed appraised value - if costs overrun, you may need extra cash. Contingency reserves of 10% to 15% of build cost are standard in underwriting.
Related guides
- 30-Year vs 15-Year Mortgage - Savings (2026) Compare 30-year vs 15-year mortgage payments and total interest in 2026. See how $200/month extra on a 30-year can match a 15-year payoff. Free calculator.
- Closing Costs Explained - Free Estimator (2026) How much closing costs really are in 2026. On a $300k home, expect $6k to $18k. Enter your price and state for an itemized cash-to-close estimate. Free.
- DTI & Mortgage Prequalification Guide (2026) Learn front-end and back-end debt-to-income (DTI) ratio limits for mortgage prequalification. Free DTI calculator with the 28/36 rule. CFPB-sourced guide.
- FHA Loan Qualifications & Requirements (2026) See FHA loan qualifications for 2026: 580 credit score, 3.5% down, debt ratio limits, and mortgage insurance costs. Free FHA loan calculator included.
- FHA vs Conventional Loan - Run the Numbers (2026) Compare FHA vs conventional loans in 2026. Enter your price and down payment to see MIP vs PMI and monthly payment. Free FHA calculator.