Construction Loan Interest Calculation

I need an example of how the interest on a construciton loan is determined and paid. My construction loan interest rate is 7.75% and I understand that during the constuction phase I am to pay the interest on the amount dispersed. So does that mean that I will own 6 months interest (6 months is the amount of time I have to get the house built) paid over the 6 month period based on the dispersed amount or draws?

1 Answer

Interest on a construction loan is a very simple formula that anyone can calculate. If your current interest rate is 7.75% you simply take the balance that has been drawn or borrowed. You then multiply this balance by .0775. Then take that number and multiply it by 12 ( 12 months in a year ). This is your monthly interest only payment.

You will make these payments based on the amount drawn or the average daily balance of the loan for the previous month. You will be making this interest only payment for the 6 month period that the construction is in process.

Once construction is complete the loan will then be modified ( if this is a construction to perm financing product ) ... Once modified you will have a fixed payment based on principle and interest. At time of modification you will be able to pay down the construction loan ( if you are utilizing equity from a pending sale or other source ) or you can float your interest rate down to market conditions ( if you selected a float down option ).