When You Get a Construction Loan, When Do You Start Paying? Complete Guide
One of the most common questions borrowers ask about construction loans is when payments actually begin. Unlike traditional mortgages where payments start immediately after closing, construction loans follow a unique payment structure that changes as your project progresses. Understanding this timeline is crucial for budgeting and financial planning.
The Short Answer: Payments Begin After the First Draw
Your first construction loan payment is typically due approximately 30 days after the initial disbursement of funds - not when you close on the loan. This means if you close on your construction loan in January but your builder doesn't draw funds until February, your first payment won't be due until March.
During the construction phase, you'll make interest-only payments on the amount that has been disbursed. Once construction is complete and your loan converts to permanent financing, you'll begin making full principal and interest payments on the entire loan balance.
How Construction Loan Payments Work: Two Distinct Phases
Phase 1: Interest-Only During Construction
During the building phase, construction loan payments are structured differently than traditional mortgages:
What You Pay:
- Interest only on disbursed funds
- No principal payments required
- Payments increase as more money is drawn
When You Pay:
- First payment due 30 days after first draw
- Monthly payments throughout construction
- Typically 6-18 months duration
How It's Calculated: Your monthly payment equals the outstanding balance multiplied by your interest rate, divided by 12. For example:
- $150,000 drawn at 7.5% = $937.50/month
- $300,000 drawn at 7.5% = $1,875/month
- $450,000 drawn at 7.5% = $2,812.50/month
This graduated payment structure benefits borrowers because you're not paying interest on money you haven't used yet. However, it means your payment increases with each construction draw, so you need to budget for the maximum payment amount by project end.
Phase 2: Full Principal and Interest After Completion
Once your home is finished and passes final inspection, your construction loan converts to a permanent mortgage. This triggers several important changes:
What Changes:
- Interest-only payments end
- Full principal and interest payments begin
- Payment calculated on entire loan balance
- Rate may convert from variable to fixed
- Escrow account often established
When It Happens:
- Within 30-60 days of completion
- After certificate of occupancy issued
- Following final construction inspection
What to Expect: Your payment will increase significantly - often by 50-70% or more - when converting to full principal and interest. A borrower paying $2,000/month interest-only during construction might see payments jump to $3,200-$3,500/month for the permanent mortgage.
The Construction Draw Schedule: What Triggers Payments
Understanding the draw schedule helps you anticipate when payments will increase. Most construction loans disburse funds in 4-6 draws based on completed milestones:
Typical Draw Schedule
Draw 1 - Foundation (15-20% of loan):
- Site preparation and clearing
- Foundation pouring
- Underground utilities
- First payment triggered
Draw 2 - Framing (20-25% of loan):
- Structural framing complete
- Roof installed
- Windows and exterior doors
- Payment increases
Draw 3 - Mechanical Rough-In (15-20% of loan):
- Electrical wiring
- Plumbing installation
- HVAC ductwork
- Payment increases again
Draw 4 - Interior Finish (20-25% of loan):
- Drywall and painting
- Flooring installation
- Cabinet and fixture installation
- Payment approaches maximum
Draw 5 - Final Completion (15-20% of loan):
- Final fixtures and appliances
- Landscaping and exterior finish
- Final inspections passed
- Maximum interest payment
Each draw requires an inspection by the lender (or their representative) to verify work completion before funds are released. This protects both you and the lender from paying for incomplete work.
Budget Planning: Anticipating Your Payment Changes
Smart borrowers plan for the entire payment lifecycle, not just the initial amounts. Here's how to budget effectively:
During Construction
Calculate Maximum Interest Payment: Take your total construction loan amount and calculate the interest-only payment at full disbursement. This represents your highest payment during the construction phase.
Example for a $500,000 construction loan at 7.5%:
- Maximum monthly interest: $3,125
- Plan to reach this by month 8-12
Account for Existing Housing Costs: If you're renting or have a current mortgage while building, you'll carry both payments during construction. Budget for:
- Current rent/mortgage: $2,000
- Construction interest (average): $1,800
- Combined monthly obligation: $3,800
Build a Payment Reserve: Set aside 3-6 months of maximum construction payments in an emergency fund. Construction delays happen, and you'll need cash flow to handle extended timelines.
After Completion
Calculate Your Permanent Payment: Use our commercial mortgage calculator to estimate your permanent mortgage payment. Include:
- Principal and interest
- Property taxes (often 1-2% of home value annually)
- Homeowners insurance
- Private mortgage insurance (if applicable)
Prepare for Payment Shock: The transition from interest-only to full P&I creates payment shock for many borrowers. A $500,000 loan might see payments change from:
- Construction phase: $3,125/month (interest-only)
- Permanent phase: $3,160/month (P&I at 6.5%, 30 years)
- Plus escrow: $600/month (taxes and insurance)
- Total after completion: $3,760/month
The permanent payment may be similar to or higher than your maximum construction payment, plus you'll have escrow obligations.
Construction-to-Permanent vs. Stand-Alone Construction Loans
The type of construction loan you choose affects when and how payments transition:
Construction-to-Permanent Loans (Single-Close)
How Payments Work:
- Single loan covers both phases
- Interest-only during construction
- Automatically converts to permanent mortgage
- One closing, one set of closing costs
Payment Timeline:
- Close on loan (no payment yet)
- First draw triggers first payment
- Interest-only payments during building
- Automatic conversion at completion
- Full P&I payments begin
Advantages:
- Locked-in permanent rate (often)
- Simplified process
- Lower total closing costs
- No refinancing required
Learn more about vertical construction financing options that use this structure.
Stand-Alone Construction Loans (Two-Close)
How Payments Work:
- Separate construction and permanent loans
- Interest-only during construction
- Must refinance to permanent mortgage
- Two closings, two sets of costs
Payment Timeline:
- Close on construction loan
- Interest-only payments during building
- Construction loan matures at completion
- Close on permanent mortgage
- Full P&I payments begin
Considerations:
- May offer more flexibility
- Risk of rate changes between loans
- Higher total closing costs
- Requires qualifying twice
Factors That Affect Your Construction Loan Payments
Several variables influence how much you'll pay and when:
Interest Rate Type
Variable Rate: Most construction loans carry variable rates tied to prime or LIBOR. Your payment can fluctuate monthly based on market conditions.
Fixed Rate (During Construction): Some lenders offer fixed construction rates, providing payment stability during building.
Conversion Rate: Your permanent mortgage rate may be locked at closing or set at conversion. Understand your rate lock terms before closing.
Loan Amount and LTV
Higher loan amounts mean higher payments. Most construction loans require:
- 20-25% down payment
- Loan-to-value (LTV) of 75-80%
- Combined loan-to-value (CLTV) if land is separately financed
Construction Timeline
Longer construction periods mean more months of interest-only payments:
- 6-month build: ~$9,000-$15,000 total construction interest
- 12-month build: ~$15,000-$25,000 total construction interest
- 18-month build: ~$22,000-$35,000 total construction interest
Delays extend your interest-only period and total interest costs.
Builder Efficiency
Experienced builders who draw funds efficiently can minimize your interest costs. Builders who front-load draws increase your payments earlier in the process.
What Happens If Construction Is Delayed?
Construction delays are common and affect your payment obligations:
Extended Interest-Only Period
If your 12-month project stretches to 18 months:
- Six additional months of interest payments
- Higher total interest costs
- Potential rate adjustment on permanent loan
Loan Extension Fees
Most construction loans include 12-18 month terms. If you exceed this:
- Extension fees (typically 0.25-0.50% of loan amount)
- Higher interest rate may apply
- Additional documentation required
Rate Lock Expiration
If you locked your permanent rate at closing:
- Lock may expire during delays
- Re-locking may cost additional fees
- Market rates may have increased
Budget Impacts
Extended construction means:
- More months paying for current housing
- Additional interest payments
- Potential cash flow strain
- Depleted reserves
To avoid these issues, build realistic timelines with buffer for weather and material delays. Contact our construction loan specialists to discuss timeline planning for your project.
Making Payments During Construction: Practical Tips
Set Up Automatic Payments
Most lenders offer autopay for construction loan payments. This ensures:
- No missed payments
- Potential rate discount (some lenders)
- Simplified tracking
Track Your Draws
Request draw notifications from your lender and builder. Know when funds are disbursed so you can:
- Anticipate payment increases
- Verify charges are accurate
- Monitor construction progress
Maintain Payment Records
Keep detailed records of all construction loan payments for:
- Tax deduction documentation
- Loan balance verification
- Dispute resolution if needed
Monitor Your Cash Flow
Track your monthly obligations carefully:
- Current housing costs
- Construction loan payments
- Property taxes (if not escrowed)
- Insurance premiums
- Utility deposits for new home
For investment properties, DSCR loan programs may offer alternative payment structures worth exploring.
Special Payment Considerations
Interest Reserve Accounts
Some construction loans include an interest reserve - funds set aside from the loan to cover interest payments during construction:
How It Works:
- Lender calculates estimated interest for construction period
- Amount added to loan or set aside at closing
- Payments made from reserve automatically
- Unused funds applied to loan at completion
Pros:
- No out-of-pocket payments during construction
- Simplified budgeting
- One less monthly obligation
Cons:
- Paying interest on interest
- Higher loan amount
- Less control over payment timing
Paying During Construction While Renting
Many borrowers face dual housing costs during construction:
Strategies to Manage:
- Negotiate month-to-month lease for flexibility
- Time construction start with lease end
- Plan for temporary housing in budget
- Consider living with family during building
- Build interest reserve into loan
Investment Property Considerations
Construction loans for investment properties may have different payment requirements:
- Higher interest rates
- Larger down payments
- No interest reserve option
- Stricter qualification requirements
Preparing for the Payment Transition
The switch from construction to permanent financing deserves careful planning:
60 Days Before Completion
- Confirm permanent loan terms
- Verify interest rate lock status
- Review final loan amount
- Calculate estimated permanent payment
30 Days Before Completion
- Complete final walkthrough with builder
- Address any punch list items
- Schedule final inspection
- Prepare for closing (if two-close loan)
At Conversion
- Sign modification documents (single-close)
- Close on permanent loan (two-close)
- Set up escrow account
- Arrange automatic payments
First 90 Days After Completion
- Verify first permanent payment amount
- Confirm escrow calculations are accurate
- Update insurance coverage if needed
- Speak with a construction loan expert if payment questions arise
Calculate Your Construction Loan Payments
Understanding your payment timeline requires accurate calculations. Here's how to estimate your costs:
Construction Phase Interest Formula
Monthly Interest = (Amount Drawn x Annual Interest Rate) / 12
Example: $350,000 drawn at 7.25% = ($350,000 x 0.0725) / 12 = $2,114.58/month
Permanent Phase Payment Formula
Use an amortization calculator or our commercial mortgage calculator to determine permanent payments based on:
- Loan amount
- Interest rate
- Loan term (15, 20, or 30 years)
Example: $450,000 at 6.5% for 30 years = $2,844/month (P&I only) Add taxes and insurance for total payment
Frequently Asked Questions
Do I make payments at closing?
No. Construction loan payments don't begin until funds are disbursed to your builder. You may pay closing costs and prepaid items at closing, but your first monthly payment comes later.
Can I make principal payments during construction?
Some loans allow principal payments during construction, which can reduce your permanent loan balance. Check your loan terms - not all construction loans permit this.
What if I can't afford the payment increase?
If the permanent payment is too high, options include:
- Refinancing to a longer term
- Bringing cash to reduce loan balance
- Selling the property before conversion
Are construction loan interest payments tax deductible?
Yes, construction loan interest on a primary residence is generally tax deductible, similar to mortgage interest. Consult a tax professional for your specific situation.
What happens if I sell during construction?
You can sell a property under construction, but you'll need to pay off the construction loan from sale proceeds. Any amount drawn plus accrued interest must be repaid.
Your Next Steps
Understanding construction loan payments helps you plan effectively for your building project. Whether you're building a custom home or developing an investment property, knowing when payments start and how they change prepares you for financial success.
Ready to move forward with your construction project? Here's what to do:
- Calculate Your Budget: Use our tools to estimate payments during both phases
- Build Cash Reserves: Set aside 3-6 months of maximum payments
- Compare Loan Options: Evaluate construction-to-permanent vs. stand-alone loans
- Get Pre-Approved: Contact our construction loan specialists to discuss your project
- Plan Your Timeline: Work with your builder to create realistic schedules
- Apply for your construction loan: Start the process with experienced construction lenders
Final Thoughts
Construction loan payments follow a predictable pattern: interest-only during building, full principal and interest after completion. Your first payment comes approximately 30 days after the initial draw, and payments increase as more funds are disbursed throughout construction.
The key to managing construction loan payments successfully is planning ahead. Know your maximum interest-only payment, prepare for the permanent mortgage amount, and maintain cash reserves for unexpected delays. With proper preparation, the payment transition from construction to permanent financing becomes a manageable milestone rather than a financial surprise.
Building your dream home or investment property is an exciting journey. Understanding exactly when and how you'll make payments removes one source of uncertainty from the process. With this knowledge, you can focus on what matters most - creating the property you've envisioned.
Have questions about construction loan payments for your specific project? Contact our construction loan specialists today for personalized guidance.