Construction Loan Draw Calculator Formula
Understand the math behind the construction loan draw calculator. Each variable explained with a worked example.
Formulas Used
Amount Per Draw
per_draw = draw_amountEstimated Total Interest
total_interest_cost = total_interestOrigination Fee
origination = origination_feeTotal Inspection Fees
inspection_total = total_inspectionTotal Financing Cost
total_financing_cost = total_loan_costAverage Outstanding Balance
avg_outstanding = avg_balanceVariables
| Variable | Description | Default |
|---|---|---|
total_loan | Total Loan Amount(USD) | 350000 |
num_draws | Number of Draws | 5 |
annual_rate | Annual Interest Rate(%) | 9 |
construction_months | Construction Period (months) | 8 |
origination_pct | Loan Origination Fee(%) | 2 |
inspection_fee_per_draw | Inspection Fee Per Draw(USD) | 250 |
draw_amount | Derived value= num_draws > 0 ? total_loan / num_draws : 0 | calculated |
months_per_draw | Derived value= num_draws > 0 ? construction_months / num_draws : 0 | calculated |
monthly_rate | Derived value= annual_rate / 100 / 12 | calculated |
avg_balance | Derived value= total_loan * (num_draws + 1) / (2 * num_draws) | calculated |
total_interest | Derived value= avg_balance * monthly_rate * construction_months | calculated |
origination_fee | Derived value= total_loan * origination_pct / 100 | calculated |
total_inspection | Derived value= inspection_fee_per_draw * num_draws | calculated |
total_loan_cost | Derived value= total_interest + origination_fee + total_inspection | calculated |
How It Works
Construction Loan Draw Schedules
Construction loans disburse funds in stages (draws) as building milestones are completed. Interest is charged only on the amount drawn, making the draw schedule critical for managing costs.
How Draws Work
1. The lender approves a total loan amount based on the construction budget 2. As each construction phase is completed, the builder requests a draw 3. The lender sends an inspector to verify the work is done 4. The lender disburses the next draw amount 5. Interest accrues on the cumulative balance outstanding
Typical Draw Milestones
Interest Calculation
Because the balance increases with each draw, the average outstanding balance is approximately half the total loan amount. Total interest = Average Balance x Monthly Rate x Months.
Worked Example
$350,000 construction loan, 5 draws, 9% annual rate, 8-month construction, 2% origination, $250 inspection per draw.
- 01Amount per draw: $350,000 / 5 = $70,000
- 02Average outstanding balance: $350,000 x (5 + 1) / (2 x 5) = $210,000
- 03Monthly rate: 9% / 12 = 0.75%
- 04Total interest: $210,000 x 0.75% x 8 = $12,600
- 05Origination fee: $350,000 x 2% = $7,000
- 06Inspection fees: $250 x 5 = $1,250
- 07Total financing cost: $12,600 + $7,000 + $1,250 = $20,850
Frequently Asked Questions
How is construction loan interest calculated?
Interest is charged only on the disbursed (drawn) amount, not the total loan. As each draw increases the outstanding balance, the interest payment increases monthly. Most construction loans are interest-only during the construction period, with the principal due at maturity or when converted to a permanent loan.
What is a construction-to-permanent loan?
A construction-to-permanent (C2P) loan automatically converts from a construction loan to a permanent mortgage when the home is complete. This saves the borrower a second set of closing costs. The permanent loan terms (rate, amortization) are locked at the time of the original closing.
What happens if construction takes longer than expected?
Most construction loans include a completion timeline with a buffer period. If you exceed the timeline, the lender may charge extension fees (0.25-0.50% per month) and may require updated financials. Significant delays can jeopardize the loan commitment.
Ready to run the numbers?
Open Construction Loan Draw Calculator