Construction Loan Calculator — Build Cost & Draw Schedule

Construction Loan Phases Explained

Construction financing typically occurs in two distinct phases, each with different terms and payment structures. The first phase is the construction loan itself, a short-term loan (usually 6 to 18 months) that finances the actual building process. During this phase, funds are disbursed incrementally through a draw schedule as construction milestones are completed, and the borrower typically pays only interest on the amount that has been drawn. Interest rates on construction loans are usually 1% to 2% higher than conventional mortgage rates, and they are almost always variable rate. The second phase begins when construction is complete and the loan converts to a permanent mortgage, either through a separate closing (two-close construction loan) or automatically (one-time-close or construction-to-permanent loan). According to the National Association of Home Builders (NAHB), construction lending has become more stringent since the 2008 housing crisis, with most lenders requiring 20% to 25% down, strong credit scores, detailed construction plans, and builder approval before approving a construction loan.

Understanding Draw Schedules

The draw schedule is the framework that governs how and when construction loan funds are released to the builder. A typical construction loan is divided into 4 to 6 draws corresponding to major construction milestones. A common schedule includes: Draw 1 at land purchase and site preparation (15-20% of total), Draw 2 at foundation completion (10-15%), Draw 3 at framing and rough-in (25-30%), Draw 4 at mechanical rough-in including electrical, plumbing, and HVAC (15-20%), Draw 5 at drywall and interior finishes (10-15%), and a final draw at completion and certificate of occupancy (5-10%). Before each draw is released, the lender sends an inspector to verify that the work has been completed to the specified stage. This inspection-and-release process protects both the lender and borrower from paying for work not yet performed. Interest charges increase with each draw because the outstanding loan balance grows incrementally. On a $450,000 total project, early-stage interest payments might be $625 per month, growing to $2,813 per month by the final draw at 7.5% interest. The Consumer Financial Protection Bureau (CFPB) recommends that borrowers understand their draw schedule completely before closing and negotiate hold-back amounts that align with their builder's payment expectations.

Construction-to-Permanent Loans

A construction-to-permanent (C2P) loan, also called a one-time-close loan, combines the construction phase and permanent mortgage into a single loan with one closing. This structure offers several advantages over the traditional two-close approach. First, you pay closing costs only once, saving $3,000 to $10,000 compared to closing twice. Second, your permanent rate is locked at the initial closing, protecting you from rate increases during the construction period. Third, you have certainty that permanent financing will be available once construction is complete, eliminating the risk of being unable to qualify for a mortgage after building. The primary disadvantage is that C2P loans typically carry slightly higher rates than traditional construction loans, and the permanent rate may be higher than what you could obtain if market rates decline during construction. FHA, VA, and USDA all offer one-time-close construction loan programs, making this option accessible to first-time buyers and veterans. The Fannie Mae construction-to-permanent program allows qualified borrowers to lock in competitive conventional rates with as little as 5% down on the completed home value. However, not all lenders offer C2P products, so borrowers may need to shop specifically for this loan type.

Building Costs Breakdown

Understanding the typical cost breakdown of new home construction helps borrowers set realistic budgets and identify potential areas for cost savings. According to the NAHB's Cost of Constructing a Home survey, the major cost components for a typical single-family home in 2026 break down as follows: site work and foundation (12-15%), framing and structural (18-22%), major systems including electrical, plumbing, and HVAC (14-18%), exterior finishes including roofing, siding, and windows (12-15%), interior finishes including drywall, paint, flooring, and cabinets (20-25%), and final site improvements including landscaping, driveway, and walkways (5-8%). The national average cost per square foot for new construction ranges from $150 to $250, with significant variation by region. Coastal and metropolitan areas in California, New York, and the Pacific Northwest can exceed $300 per square foot, while parts of the Midwest and South may come in below $130. Beyond hard construction costs, borrowers should budget for soft costs including architectural plans ($5,000-$15,000), permits and impact fees ($3,000-$25,000 depending on jurisdiction), survey and soil testing ($2,000-$5,000), and a contingency reserve of 10% to 15% for unexpected expenses.

Builder Selection and Contract Tips

Choosing the right builder is arguably the most important decision in the construction process, directly impacting cost, quality, timeline, and stress level. Start by verifying the builder's license, insurance, and bonding status with your state's contractor licensing board. Request and contact at least five references from recent projects of similar scope and budget. Visit completed homes and, if possible, homes currently under construction to assess quality of workmanship. Review the builder's financial stability, as builder bankruptcy during construction can create devastating delays and cost overruns. The contract itself should specify a fixed price or guaranteed maximum price (GMP), a detailed scope of work with specific materials and finishes listed by brand and model, a construction schedule with milestone dates and penalties for delays, a clear change order process with pre-agreed markup rates, warranty terms (typically one year for workmanship, two years for mechanical systems, and ten years for structural), and a dispute resolution mechanism. The Federal Trade Commission (FTC) advises homebuyers to have any construction contract reviewed by a real estate attorney before signing. Cost-plus contracts (builder charges actual costs plus a percentage fee) offer transparency but less cost certainty, while fixed-price contracts provide budget certainty but may lead to builder corner-cutting if material costs rise unexpectedly.