A great question most of my clients ask is, "How much will my monthly construction loan payment be?" They're trying to determine if they can afford to make that payment along with their regular house payment, whether that's a mortgage or rent payment.
How You Figure Out a Construction Loan Payment
First of all, depending on the bank, they might ask you to pay the interest monthly or quarterly. Either way, you'll want to budget for it monthly so you don't get surprised by a large quarterly payment.
Second, let me briefly describe how a construction loan works. It's a little different from the mortgage loan you're familiar with if you've ever bought a house and made payments.
Mortgage Loan
A loan to buy an existing house comes in one lump sum. For example, let's say you borrow $500,000 to buy a house. The bank hands the money over to the seller in one lump sum, and you agree to make monthly principal and interest payments to the bank until the loan is paid off. Pretty simple.
Construction Loan
A construction loan, however, is different in two key ways:
- 1. It funds in stages that roughly match the cost of construction as it progresses.
- 2. You don't make principal and interest payments, only interest.
When you close on your construction loan, you haven't actually borrowed any of the money yet, so at first there's no interest adding up. Then your builder installs the plumbing under the slab and pours the slab. You take a draw from your construction loan and pay the builder. Then the builder frames the house and installs the roof shingles. You get another draw and pay the builder.
Breaking Down Your Interest Payments
At this point, let's say you've drawn, or borrowed, $50,000 of your $500,000 construction loan. Let's say the interest rate on your construction loan is 8%. The 8% is an annual number, and 8 divided by 12 is 0.67, so your monthly interest rate is 0.67%. You've borrowed $50,000 so far, so 0.67% of that is $333.33. That's going to be your interest payment next month.
If next month you draw another $25,000, then your interest will be $500, because you're paying that 0.67% interest on the total amount you've borrowed to date. The worst month will be the month between when the builder finishes the house. You'll pay him the final payment and close on your permanent mortgage.
Read more about the difference between construction loan and permanent mortgage.
At that point, you'll have borrowed the whole amount, so your payment is 0.67% of $500,000, or $3,333.33 in this example. When you close on your permanent mortgage, that new loan will pay off your construction loan, and you'll begin making payments just like you're used to doing.
Construction Loan Payments Can Be Less Painful
Here's a little trick that might make the monthly interest payments less painful. Assuming your house appraises for enough initially to keep the loan to value within limits, you can actually finance the interest payments.
That simply means the bank will calculate the amount of interest you'll likely owe during the term of your construction loan and increase the amount of the loan by that amount. Then, you'll make a draw against your permanent mortgage loan to make the interest payment.
Yes, you're borrowing money to pay interest, but it's such a small amount and for such a short period, the extra interest is negligible and might make the difference between building your dream home now and waiting until you're too old to enjoy it.
The Simple Breakdown
If you're skeptical (or are a Dave Ramsey devotee), here's the math. Let's use the example above where the first interest payment is $333.33. If you borrowed that in the first month of construction and paid it back when you close your permanent loan six months later, you would owe six months of interest at a rate of 0.67% per month on that $333.33. That's 0.67% per month for 6 months on the $333.33, which adds up to an extra $13.56.
Hopefully that information helps you plan your budget during the construction process and sheds just a little more light on what can be a seemingly mysterious process.
If you need help calculating how much your monthly construction loan payment will be, we'd love to help. Schedule a pressure free call with our team to get your questions answered.
For more information on the whole process of building a home on your land, check out our free guide:
Frequently Asked Questions About Construction Loan Payments
What Are Construction Loan Interest Rates?
Construction loan interest rates are typically 1%–3% higher than traditional mortgage rates, because lenders take on more risk financing a home that hasn’t been built yet.
Most borrowers see construction loan rates in the range of:
- 7%–11% depending on market conditions
- Credit score
- Down payment
- Loan type
- Builder qualifications
Construction loans often have variable rates tied to the prime rate during the build. Once construction is complete, the loan usually converts to a fixed-rate mortgage or is refinanced into one.
How Much Is a Construction Loan?
Construction loan amounts vary widely but usually cover 75%–80% of the completed home’s appraised value.
Example:
- Completed home value: $500,000
- 80% loan amount: $400,000
- Required borrower equity: $100,000
Loan size depends on:
- Appraised value of finished home
- Construction cost
- Land value or equity
- Credit profile
- Debt-to-income ratio
Because lenders base approval on the future value of the home, appraisal plays a major role in determining how much you can borrow.
Is There a Construction Loan Calculator?
Yes — a construction loan calculator estimates your monthly payments based on:
- Loan amount
- Interest rate
- Draw schedule
- Build timeline
Unlike mortgage calculators, construction loan calculators must account for incremental draws, meaning payments increase as more funds are released during construction.
To estimate manually, use:
Monthly Payment = (Interest Rate ÷ 12) × Amount Drawn So Far
Because balances change throughout construction, your payment is not fixed until the loan converts to a mortgage.
How Does a Construction Loan Work?
A construction loan is a short-term loan used to finance building a home, paid out in stages instead of one lump sum.
Typical process:
- Borrower is approved based on plans and budget
- Funds are released in scheduled draws
- Builder is paid after inspections
- Borrower makes interest-only payments during construction
- Loan converts to mortgage after completion
Unlike traditional loans, lenders monitor progress and approve each phase before releasing funds. This protects both the lender and borrower.
What Is a Construction Loan Payment Schedule?
A construction loan payment schedule changes throughout the build because payments are based only on the amount drawn so far.
Typical progression:
- Month 1–2: small payment (only initial draw used)
- Mid-build: moderate payment as draws increase
- Final stage: highest payment when most funds are disbursed
Payments are usually interest-only during construction, which helps keep early monthly costs low.
Once construction is finished, payments switch to standard principal + interest mortgage payments.
Are Construction Loans Available in Oklahoma?
Yes — construction loans are widely available in Oklahoma through:
- Local banks
- Credit unions
- Regional lenders
- National mortgage companies
Borrowers building in Oklahoma typically need:
- 680+ credit score
- 20% down payment or equity
- Licensed builder
- Approved plans and budget
Local lenders often have the advantage of understanding regional land values, permitting processes, and appraisal standards, which can streamline approval.