How to Calculate Construction Loan Interest During the Draw Period
Construction loan interest works differently from a standard mortgage - and the difference catches a lot of builders and developers off guard when the final financing cost comes in higher than budgeted. With a mortgage, you borrow the full amount on day one and pay interest on the full balance from the start. With a construction loan, you draw funds in stages as the project progresses, and you only pay interest on what you've drawn. The catch is that each draw increases the balance, so interest accrues on a rising number every month. The total interest cost depends on your draw schedule and construction timeline, not just your rate and loan amount.