Construction Loan Guides & Resources

A construction loan is a short-term, higher-interest loan that provides funds to build a residential property. Unlike a traditional mortgage where the bank hands you a lump sum, construction loans are disbursed in increments called “draws” as construction milestones are completed and inspected. You only pay interest on the funds that have been drawn — which means your monthly payments start small and grow as the project progresses.

Construction-to-Permanent vs. Construction-Only

There are two primary types of construction loans, and the choice between them affects your closing costs, flexibility, and long-term rate:

Most first-time builders opt for a construction-to-permanent loan because it reduces paperwork and locks in the rate. Our construction loan calculator models both the interest-only construction phase and the permanent mortgage conversion so you can plan the full journey.

The “Money Puzzle”: How Draw Schedules Work

The bank doesn't hand over a check on day one. Instead, construction loans are paid out in “draws” — scheduled disbursements tied to completed milestones. An inspector verifies each milestone before the next draw is released. A typical draw schedule looks like this:

During the interest-only period, you only pay interest on the outstanding balance at each stage. That's why your monthly payment during framing (30% drawn) is much lower than at completion (100% drawn). Use our calculator to see exactly how this affects your monthly costs.

Soft Costs: The Money You Spend Before Breaking Ground

Most first-time builders are surprised to learn that 6–10 months of planning and spending happen before the construction loan even begins. These are called “soft costs” — and they typically account for roughly 8% of your total project budget. Here's how that breaks down:

These costs are typically paid out-of-pocket during a 6–10 month pre-planning phase — before your construction loan even opens. A good builder will help you map these out so you're not caught off-guard. Our calculator now includes an optional soft cost estimator to help you budget for this phase.

Contingency: Your Safety Buffer

Most lenders require a 5–10% contingency reserve for unforeseen site conditions, material price shifts, or change orders. This isn't extra budget you're hoping to spend — it's a safety net that gives you and your lender confidence that the project can handle surprises. Our calculator lets you toggle a contingency percentage so you can see how it impacts your total loan amount and interest costs.