A construction loan draws funds incrementally as building progresses, so interest accrues only on the portion actually drawn at any point.
How it works
The loan amount times an average draw percentage (often assumed around 50% for a straight-line draw schedule) gives the average outstanding balance. Applying the annual rate and construction period to that average gives the interest reserve needed.
What this does not include
This uses a simplified average-draw assumption — actual construction draws often follow an uneven schedule (larger draws at certain milestones), which would require a period-by-period calculation for precise accuracy rather than this single average.
How to use this calculator
- Enter the total construction loan amount, average draw percentage, annual rate, and construction period.
Frequently asked questions
Why is interest reserve important to plan for?
Many construction loans require the borrower to have funds available to cover interest payments during construction, before the home generates any income or the permanent loan takes over — underestimating this reserve can create a cash-flow problem.
What’s a typical average draw percentage assumption?
50% is a common simplifying assumption for a roughly straight-line draw schedule, though actual construction projects often draw unevenly, with larger amounts released at specific milestones.
Does the interest reserve get added to the loan balance?
Often yes — many construction loans include the interest reserve within the total loan amount, meaning the borrower doesn’t need separate out-of-pocket cash to cover interest during the build.
