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Category Mortgage Loans

Total Project Cost ($)

Down Payment ($)

Interest Rate (Construction %)

Interest Rate (Permanent %)

Construction Duration (Months)

Simulated Draw Schedule (Cumulative)

Month 3 (Foundation)%

Month 6 (Framing)%

Month 9 (Systems)%

Month 12 (Finish)%

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About

Financing the construction of a custom home requires a specialized approach that differs significantly from purchasing an existing property. Unlike a standard mortgage where principal and interest are paid immediately, a construction loan typically operates on an interest-only basis during the building phase. This period involves a 'draw schedule' where funds are released as construction milestones are met.

Accuracy in planning these payments is vital. Homebuilders often underestimate the cash flow requirements during the draw period, leading to liquidity issues before the home is even finished. This tool bridges that gap by modeling the tiered interest payments based on the cumulative amount drawn, followed by the transition into a permanent amortized mortgage.

Formulas

During the construction phase, interest is calculated only on the funds currently drawn:

I_m = D_total × r12

Where D_total is the cumulative drawn amount and r is the annual interest rate.

For the permanent mortgage phase, the standard amortization formula applies:

P = L r(1 + r)ⁿ(1 + r)ⁿ − 1

Reference Data

Construction Stage	Typical Draw %	Description of Work	Avg. Duration
1. Foundation	10-15%	Excavation, footings, pouring concrete, waterproofing.	2-4 Weeks
2. Framing	20-25%	Skeleton structure, roof trusses, sheathing, windows.	4-8 Weeks
3. Systems (MEP)	20-25%	Plumbing, electrical, HVAC ducting, insulation.	4-6 Weeks
4. Interior/Exterior Finish	20-25%	Drywall, siding, cabinets, flooring, trim work.	6-10 Weeks
5. Final Completion	10-15%	Landscaping, driveway, final cleaning, Certificate of Occupancy.	2-4 Weeks
Total Project	100%	Full custom build cycle.	6-12 Months

Frequently Asked Questions

This is a single-close loan. You pay closing costs once. During the build, you make interest-only payments on the drawn funds. Once the house is complete, the loan automatically converts to a standard principal and interest mortgage.

Cost overruns are the borrower's responsibility. Banks generally will not increase the loan amount mid-construction. You must pay these out-of-pocket, which is why maintaining a contingency fund of 10-15% is recommended.

No. You only pay interest on the money that has been paid out (drawn) to the builder. For example, if you have a $500,000 loan but have only used $100,000 for the foundation, you are only charged interest on the $100,000.

Policies vary by lender. Some offer a rate lock at the beginning (often with a fee for extended lock periods), while others float the rate during construction and set the final rate upon conversion to the permanent mortgage.