Getting a construction loan to build your dream home can be an exciting yet complicated process One of the key things you’ll want to figure out is how much your monthly payments will be during the construction phase when you are only paying interest, versus when the loan converts to a regular mortgage and you start paying down principal. That’s where a construction loan interest only calculator comes in handy.
In this article, I’ll explain what a construction loan interest only calculator is, when you would use it, and walk through a step-by-step example so you can see how it works.
What Is A Construction Loan Interest Only Calculator?
A construction loan interest only calculator is an online tool that allows you to estimate what your monthly payments will be on a construction loan during the “interest only” period when the home is being built.
With a construction loan, you only pay interest on the money that has been drawn during the construction phase You don’t pay anything towards principal Once construction is complete, the loan converts to a regular mortgage and you begin making principal and interest payments.
The calculator helps you figure out what those interest only payments will be so you can properly budget during construction
When Would You Use A Construction Loan Interest Only Calculator?
There are two main times when this calculator would be useful:
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When applying for a construction loan: The lender will want to see that you can afford the interest only payments during construction. This calculator lets you estimate what those will be based on the loan amount, interest rate, and construction timeline so you can show the lender you can handle the payments.
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To budget for construction: You’ll also want to use the calculator yourself to understand what your payments will be during the building phase. Construction loans only pay the builder as work is completed, so you’ll need cash on hand to cover the interest payments in the meantime. The calculator helps you estimate your payments so you can save up enough to cover them.
The interest only calculator is an essential planning tool as you apply for a construction loan and prepare to build.
Step-By-Step Example Of Using A Construction Loan Interest Only Calculator
Let’s go through an example to see how this calculator actually works:
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Enter the construction loan amount – Let’s say you need to borrow $300,000 to fund construction of your home. You would enter 300000 as the loan amount.
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Enter the estimated interest rate – Construction loans often have higher rates than mortgages. Let’s assume your rate will be 7%.
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Enter the construction timeline – You usually get 12 months to complete construction before the loan converts to a mortgage. So enter 12 months.
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Review the estimated payment – With those inputs, the calculator estimates your monthly interest only payment will be $1,750.
This means during the 12 month construction phase, you’ll need to pay $1,750 per month to cover interest. Once construction is done, the loan will convert to a mortgage and your payment will change.
- Repeat with different timelines or rates – You can tweak the inputs to see how different loan terms would impact your payment. For instance, you could see how a 6 month or 18 month timeline changes your payment.
And that’s it! In just a few minutes you can estimate your construction loan interest only payments.
Key Tips When Using The Construction Loan Interest Only Calculator
Here are some key tips to keep in mind to get the most out of this calculator:
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Be conservative with your construction timeline – It’s better to overestimate how long construction will take rather than underestimate. A longer timeline means lower payments.
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Factor in a rate cushion – Construction loan rates can fluctuate. Estimate your payments using an interest rate slightly higher than what you expect to get.
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Double check your inputs – Small tweaks to the loan amount or timeline can significantly impact your estimated payments. Double check all inputs before relying on the results.
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Use the calculator early – Run the numbers as soon as you have an initial idea of the project scope. It’s crucial to estimate payments early in the process.
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Re-run it as plans evolve – If the project scope changes at all, rerun the calculator to update your estimates. Changing the loan amount or timeline would impact your payments.
Using this construction loan interest only calculator wisely will help you accurately estimate your payments for construction budgeting and loan qualification purposes.
Frequently Asked Questions
How are construction loan interest payments calculated?
Construction loan interest is calculated based on the outstanding loan balance each month and the interest rate. For example, if you have a $300,000 balance at 7% interest, your monthly interest payment would be:
$300,000 x 0.07 (7%) / 12 = $1,750
This equals your monthly interest only payment during construction.
Can I pay principal during the construction phase?
Most construction loans do not allow you to pay down principal during construction. Your monthly payments go towards interest only. Once construction is complete, the loan converts to a mortgage and principal can be paid.
How long do I have to complete construction?
A typical construction loan gives you 6-12 months to complete construction before converting to a mortgage. Make sure to get a realistic timeline from your builder before applying for the loan.
What happens if I go beyond the construction timeline?
If construction takes longer than the allotted timeline, you’ll need to ask the lender for an extension. They may grant one, but will charge additional interest payments for the extra time. Try your best to finish on schedule.
Using an online construction loan interest only calculator makes it easy to estimate your payments during the building of your home. Be sure to use this essential tool as you apply for construction financing and create your construction budget. With a little planning, you’ll be prepared for the interest only payments ahead.
Current Local Mortgage Rates
The following table shows current 30-year mortgage rates available in Los Angeles. You can use the menus to select other loan durations, alter the loan amount. or change your location.
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.