Taking out a construction loan to build your dream home can be an exciting yet daunting process. One of the key factors you need to consider is how much your monthly payments will be during the construction phase when you are only paying interest on the loan. This is where a construction loan calculator with an interest-only payment feature comes in handy. In this article we’ll explore what an interest-only construction loan entails and how to use a calculator to estimate your payments.
What Is An Interest-Only Construction Loan?
With a traditional construction loan, you pay interest plus principal each month as the home is built. This increases your payment amount significantly.
An interest-only construction loan works differently. During the construction phase which typically lasts 6-12 months, you only pay the interest portion owed on the loan. You do not pay down principal during this time.
Once construction is complete, the loan converts to a traditional amortized mortgage. At that point, your monthly payments will include both interest and principal.
Interest-only construction loans have several benefits:
- Lower monthly payments during construction when expenses are already high
- Increased cash flow during the building phase
- Option to pay down principal faster once the amortized payments begin
However, you need to be sure you can afford the higher monthly payment once the loan converts to a mortgage. This is where using a construction loan calculator can help.
How A Construction Loan Calculator Works
A construction loan calculator gives you an estimate of what your interest-only payments will be during the construction phase. It also shows what your payments are likely to be once the loan becomes amortized.
Here’s how it works:
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Enter your loan details: This includes the total loan amount, the interest rate, and the construction phase length.
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Calculate interest-only payments: The calculator will use your inputs to estimate your monthly interest-only payments during construction.
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Estimate future mortgage payment: You can enter your expected mortgage interest rate and term to see what your post-construction monthly payments will be.
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View amortization schedule: Some calculators show a schedule of how your payments will break down between interest and principal once amortization begins.
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Compare scenarios: You can tweak the numbers to model different loan amounts, rates, and terms to find the best option.
How To Use A Construction Loan Calculator
If you’re considering an interest-only construction loan, follow these steps to use a calculator:
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Determine your total construction loan amount – Add up costs for land, construction, fees, etc. Factor in your down payment.
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Find current interest rates – Rates fluctuate often. Check online or with lenders for up-to-date percentage rates.
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Enter the construction period length – The interest-only term is usually 6-12 months. Pick your expected construction time.
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Estimate your future mortgage rate – While not guaranteed, review mortgage rate trends to make an educated guess.
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Select your desired mortgage term – 15 or 30 years are most common. Choose based on your budget and goals.
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Plug all variables into the calculator – With your numbers handy, input them into the designated fields.
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View interest-only payment estimate – The calculator will automatically display your estimated monthly payment during construction.
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Check projected mortgage payment – Make sure your post-construction monthly payment fits your budget once principal is added.
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Tweak details as needed – Adjust inputs like loan amount and rates to find the optimal scenario for affordability.
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Save amortization schedule – Take note of how much interest vs. principal you’ll pay over the life of the mortgage.
Following these steps will give you a solid idea of the monthly payments to expect during and after the construction loan. Be sure to play around with the numbers and variables to find the ideal loan fit.
Finding A Construction Loan Calculator
Now that you know how a construction loan calculator works, where can you find one? Here are some options:
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Bank websites – Many banks that offer construction loans have calculators right on their sites.
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Mortgage websites – Top mortgage sites like Bankrate, Zillow, and NerdWallet offer free calculators.
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Home building sites – Home construction sites like HomeAdvisor or contractor sites have calculators.
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Specialized tools – Sites like Money-Zine or MortgageCalculator.org have in-depth construction loan calculators.
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Google Search – A quick Google search for “construction loan calculator” brings up various calculator tools.
Look for a calculator that allows you to input a wide variety of variables and details. More customizable options give you greater ability to model the right loan for your needs.
The Benefits Of Using A Construction Loan Calculator
Utilizing a construction loan calculator offers many benefits for your building project:
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Gives you an estimate of monthly payments during the interest-only period so you can budget accurately.
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Allows you to compare payment scenarios by adjusting loan details to find the most affordable option.
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Provides peace of mind by letting you verify you can handle higher payments once amortization begins.
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Lets you plan ahead to have funds ready when principal payments kick in after construction.
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Helps you decide if it’s best to pay interest-only or opt for amortized payments from the start.
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Gives you flexibility to tweak variables like the loan amount, interest rate, or length of the construction phase.
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Allows you to share your loan estimates with family/partners/lenders to get input.
Having an estimate of what your construction loan payments will be is extremely useful. The calculator gives you an informational starting point to make smart financial decisions as you embark on building your dream home.
Things To Keep In Mind
When using a construction loan calculator, be aware that it provides estimates. Your actual payments may differ. Here are some things to keep in mind:
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Interest rates can fluctuate over the course of your project so your actual rate may differ. Locking in your rate once approved can help avoid surprises.
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Calculator payment amounts are based on consistent, on-time payments. Late payments may alter your amortization schedule.
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If your project goes over the planned construction timeline, you may owe more interest than originally estimated.
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Principal paid during the interest-only period can lower your eventual mortgage balance and future payments.
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Your mortgage lender will have final say on the exact terms and rates you qualify for based on your financial profile.
The calculator offers ballpark figures to help guide your construction loan planning. Be sure to connect with lenders to confirm precise numbers for your unique situation.
Is An Interest-Only Construction Loan Right For You?
If you’re building a home, an interest-only construction loan can be a great option. The lower payments during the build phase help offset other construction costs. But is it the best choice for your situation?
Consider these factors when deciding:
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How much can you afford once payments include principal? Get quotes from lenders.
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How stable and predictable is your income? Interest-only may provide more flexibility.
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How long do you expect the construction period to be? The shorter it is, the less interest you’ll owe.
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Do you have savings or plans to pay down principal during the interest-only phase?
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How do interest rates and monthly payments compare to alternative financing options?
Carefully weigh the pros and cons for your financial situation. Be sure to run the numbers with a construction loan calculator. This can give you the key information needed to determine if an interest-only construction loan is your best move.
Estimate Your Payments With an Interest-Only Calculator
If you’re ready to build your dream home, you want to make sure you can afford the monthly payments along the way. Using a construction loan calculator gives you an inside look at what interest-only payments during the build will entail, as well as how payments change once the loan converts to a mortgage.
Types of Real Estate Construction Loans
There are two types of real estate construction loan: a stand-alone construction loan, and a construction-to-permanent loan. Though sharing the commonalities already mentioned, they differ in the benefits they could present to you, as a borrower.
- Stand-alone construction loans: the name of this loan is a little confusing, as it WILL include a longer-term mortgage as well. But the unique trait here, is the construction loan is handled as a separate loan to the mortgage that follows – the lender uses the first loan, to get you locked into securing the larger second one. You will usually have two sets of closing (and associated costs) with this loan type – at the beginning, and then again as you refinance the larger mortgage. The interest rate is variable during the build period and becomes fixed for the mortgage part of it. The payments made during the build are interest-only, and then you settle your balance as you roll the principal into your 30-year, fixed-rate mortgage.
- Construction-to-permanent loans: a more common type of real estate loan, this one will combine the two loans (build, mortgage) into one 30-year loan at a fixed rate. This loan type will usually require more of the borrower, in terms of down payments and credit scores. The clear benefit it has over the other, is the single set of closing costs to get the full loan amount, and an ability to fix the interest rate earlier.
One benefit of the stand-alone loan is for people who already own a property and may be looking to sell it when their build is completed. The stand-alone would allow this borrower to put more money down once they sell their existing home – which they could not do with the other loan type.
The stand-alone could also help people who have less money up-front to get into their property, because they could use the finished home as collateral to secure a better rate for the mortgage.
Another strategy is to look to the government for any existing programs that might be applicable to your situation.
The US Department of Housing and Urban Development (HUD) uses FHA loans to help more buyers find homes. Boasting low down payments and closing costs with easy credit qualifying, these loans can bring opportunity to a wider range of applicants. These traits hold true in FHA real estate construction loans.
FHA construction loans are construction-to-permanent, meaning only one closing. Key benefits of this loan, compared to one you would secure at a bank, include:
- A higher DTI (debt-to-income) level may be allowed;
- Reduced down payments, even as low as 3.5%;
- Federally-insured program with specific advisors and resources.
An FHA construction loan will have a few more stipulations as well, such as land ownership involved in the deal. If you owned the land for more than six months, you cannot qualify for this loan.
Your city will also need to provide a certificate of occupancy following a detailed inspection of the property after the building period. 60 days after this is issued, your loan begins amortizing.
US military veterans might have additional options to consider. Though the VA does not itself offer any loans, some qualified VA lenders will offer VA construction loans.
The good news is that qualifying for them uses the same criteria as any VA home loan. The challenge, however, is in finding a VA lender who offers them: they are often considered too risky, so they are not common in the marketplace.
Once you do find a VA construction loan provider, you are going to need to adhere to a very strict set of guidelines and rules about the property and the finished building to meet VA regulations and property requirements. They take an average of 45-60 days to close, which is a long time for any type of mortgage.
The benefits of the VA construction loan, which is a construction-to-permanent type, include:
- Potentially getting into the loan with low, or even zero money down;
- Gentle credit requirements;
- No PMI (private mortgage insurance) and low interest rates.
The real challenge in securing a VA construction loan, is finding a lender and a builder who are both comfortable with the deal. The risks, extra paperwork and delays involved make these loans more of a true rarity in the current marketplace…but veterans can certainly benefit from the extra efforts made to find and secure them.
If building your own home is a dream held, you should be happy that there are loan programs designed specifically to help you achieve that goal.
You should expect to put in some extra footwork to find a lender offering your loan, as well as saving for a larger down payment typically required. You’ll want to be building your credit score too, as it will play a larger role in your qualification.
If you are not a licensed contractor yourself, you will want to find a builder to work with who understands your funding needs. You will need plans and schedules to submit for funding, and you will have multiple checkpoints during construction to keep everything on-track.
You will receive money during the draw period, during which you are paying only interest on your loan. Following the build, you will have a 15- or 30-year mortgage at a fixed rate and pay either one or two sets of closing costs to get there, depending on your loan type.
As you can see, despite their complexity, construction real estate loans do provide opportunity and potential for many prospective homebuyers. While they may not be as popular and common as other types of mortgages, they can certainly be the key in helping you achieve your own dream home.
Current Local Mortgage Rates
The following table shows current 30-year mortgage rates available in Lewes. You can use the menus to select other loan durations, alter the loan amount. or change your location.
What Interest is Due During the Life of a Construction Loan?
FAQ
How to calculate interest only on a construction loan?
Are construction loans always interest only?
How do you calculate an interest-only loan?
How is interest only payment calculated?
The initial interest only payment is calculated as an interest only payment of the maximum loan minus the cost of construction. The final interest only payment during construction is calculated as an interest only payment for the maximum loan amount. The principal and interest payment for the remainder of the 30 year term of the loan.
How do I calculate a construction loan payment?
Regardless of whether the construction loan is a stand-alone or a construction-to-permanent type, there are two ways to calculate the payment amount due: The Accurate Construction Loan Calculator is easily capable of handling either payment calculation and creating an amortization schedule.
What is a construction loan calculator?
Our construction loan calculator helps you estimate the financials of your construction project. It can determine your monthly payments during your home construction project, and the monthly mortgage payments after the construction is done. It can also estimate the FHA, USDA, and VA construction loans. How Do You Calculate a Construction Loan?
What is the accurate construction loan calculator?
The Accurate Construction Loan Calculator is easily capable of handling either payment calculation and creating an amortization schedule. This calculator is also capable of handling either home construction loans or commercial construction loans equally as well. Below are the step-by-step instructions.