One closing, two very different payments
A construction-to-permanent loan behaves like two loans priced at two rates. During the build the lender bills interest only, and only on what has been drawn, so the early payments are small and grow as the balance does. At conversion the whole loan starts amortizing at the permanent rate and the payment jumps, because you are now paying principal on the full amount instead of interest on partial draws. On the calculator defaults, a $400,000 loan converting at 7 percent over 30 years carries a permanent payment of about $2,661 a month, versus a construction-phase average near $1,417. Size both numbers before you close so the step up is a plan, not a surprise.
What a real draw schedule costs
Draws are released against milestones after an inspector signs off, and the cumulative balance is what accrues interest. Here is a plausible schedule for a $400,000 construction loan at 8.5 percent over a 12 month build, with interest billed on the balance outstanding each month.
| Milestone | Draw | Balance after draw | Monthly interest at 8.5% |
|---|---|---|---|
| Foundation and site work (closing) | $60,000 | $60,000 | $425 |
| Framing complete (month 3) | $100,000 | $160,000 | $1,133 |
| Roof and mechanicals (month 6) | $100,000 | $260,000 | $1,842 |
| Interior finish (month 9) | $90,000 | $350,000 | $2,479 |
| Completion (month 11) | $50,000 | $400,000 | $2,833 |
Total build-phase interest on this schedule is about $18,000. The straight-line approximation this calculator uses puts it at $17,000.
- Inspection fees of $100 to $200 per draw come out of your pocket, and funds land 3 to 5 business days after approval.
- The interest bill tracks the schedule: months at a $60,000 balance cost $425, months at the full $400,000 cost $2,833.
- A back-loaded schedule saves interest; draws pulled early and parked in the builder's account do the opposite.
Land equity counts as down payment
Lenders generally want 20 to 25 percent down on the combined land and construction cost, and a lot you already own can carry most of it. On a $500,000 project split between a $100,000 lot and $400,000 of construction, holding the lot free and clear puts 20 percent equity into the deal before you write a check. Primary-residence borrowers can sometimes get down to lower cash requirements through an FHA construction-to-permanent program, subject to FHA limits and extra documentation. Investment builds go the other direction: 25 to 30 percent down, higher rates, and some lenders drop the automatic conversion so the permanent loan closes separately.
Overruns are your problem, not the lender's
The loan amount is fixed at closing. When the budget grows mid-build, the gap is yours to fund, because raising the loan requires a fresh approval and usually a new appraisal. Overruns of 10 to 20 percent are routine on custom work: hidden site conditions, material price swings, change orders. Carry a 15 percent contingency from the first budget draft. Timelines slip the same way, with permits and subcontractor scheduling routinely adding 2 to 4 months, so plan the loan term around a 12 month build even when the contract says 9. A fixed-price contract with a vetted, insured builder protects the budget better than any reserve line does. And keep the contingency in your own account rather than spending it into upgrades early; money that leaves in month two cannot patch a hole in month nine.