A construction loan payment schedule works in two directions at once: the lender releases the loan to your builder in staged draws as physical milestones are hit, and you pay interest each month on whatever has been drawn so far. Early payments are small because little money is out. They climb as the house goes up. Most construction loans run 12 to 18 months, and when the build ends the balance either converts to a permanent mortgage or has to be paid off in full.
How Draws Are Released
The lender does not hand over the loan at closing. It holds the funds and releases them in segments called draws, each tied to completion of a specific phase of construction. The phases, and the percentage of the budget assigned to each, are negotiated before closing and written into your construction contract. That cost breakdown becomes the schedule the lender follows for every disbursement.
A typical residential project moves through roughly these stages:
- Site work and foundation, which covers grading, excavation, and pouring footings or slab. This phase often accounts for 10% to 15% of the total budget.
- Framing, when the structural skeleton goes up and a larger draw covers lumber, trusses, and labor.
- Dry-in, when roof, windows, and exterior sheathing make the interior weathertight. Lenders treat this as a major milestone because it protects everything that follows.
- Mechanical rough-ins for plumbing, electrical, and HVAC behind the walls.
- Interior finish: drywall, cabinets, flooring, fixtures, and paint.
- Final draw for punch-list items, landscaping, driveway, and anything else needed for the certificate of occupancy.
The first draw often does more than pay for dirt work. Lenders usually allow soft costs in the initial disbursement: architectural and engineering fees, permits, impact fees, and insurance premiums. Origination fees and title charges may be rolled into the loan balance rather than paid out of pocket.
Expect the lender to withhold a slice of each draw as retainage, typically 5% to 10%, and hold it until the project is fully complete. Retainage keeps the contractor on the hook for finishing punch-list items and correcting defects. It gets released as part of the final draw after the last inspection.
What Each Draw Request Requires
Money does not move because the builder says a phase is done. Each draw is a formal request backed by paperwork proving the work exists and the people who did it have been paid.
The contractor submits a payment application that summarizes the contract value, work completed to date, retainage held, and the amount being requested, with a continuation sheet breaking those numbers down line by line. Any mismatch between the claimed progress and what the inspector finds will delay the disbursement.
Every request has to include lien waivers from the subcontractors and suppliers who worked on the completed phase. A lien waiver is a signed statement confirming the sub or supplier has been paid and will not file a claim against your property. Without them, an unpaid plumber or lumberyard could record a mechanic’s lien that clouds title and jeopardizes the lender’s security interest. Collecting waivers from every party on every draw is tedious and non-negotiable.
Before releasing funds, the lender orders a title bring-down to check whether any new liens have been recorded since the last draw, and sends a third-party inspector to the site to confirm the work matches the request. Residential inspection fees typically run $200 to $500 per visit, and the borrower pays them. Over five or six draws, that is $1,000 to $3,000 you should budget for up front.
How Your Monthly Interest Payment Grows
During the build you pay interest only, and only on the cumulative amount disbursed so far. The total loan commitment is irrelevant to the monthly bill. What matters is how much money is out.
On a $500,000 construction loan at 7.5%, after the first draw of $75,000 for site work and foundation, the monthly interest payment is about $469 ($75,000 × 0.075 ÷ 12). When framing pushes the drawn total to $200,000, the payment jumps to roughly $1,250. By the time $400,000 has been drawn for interior finishes, you are paying around $2,500 a month in interest alone. The payment schedule is a ramp, not a flat line.
Many lenders calculate interest on an actual/360 basis: they divide the annual rate by 360 instead of 365, which produces a slightly higher daily rate, then multiply by the actual number of days in each billing period. Over a 12-month build the effect is small but real, and it means the monthly figure can run a bit above what a straight annual-rate calculation suggests. Ask your lender which day-count method they use before closing.
Construction loan rates typically sit 1 to 2 percentage points above conventional mortgage rates because the collateral is unfinished and harder to sell if something goes wrong. On a construction-to-permanent loan the rate usually drops to a standard mortgage rate when the loan converts. On a construction-only loan, whatever the market is doing when you refinance is what you get.
Interest Reserves as an Alternative to Monthly Checks
Some lenders will build an interest reserve into the loan itself. Instead of you writing a check each month, the lender sets aside part of the loan proceeds to cover interest payments as they accrue, often with a 5% contingency buffer for delays. Anything left in the reserve at the end of construction reduces your permanent loan balance. Not every lender offers this, but it is worth asking about if cash flow during the build is a concern.
The Final Draw and What Happens After
The last draw carries the most paperwork. You submit a final set of lien waivers from every subcontractor and supplier, the completed payment application showing 100% of the work finished, and the lender orders a final inspection to confirm the house matches the plans and specifications.
You also need a certificate of occupancy from your local building department. The CO certifies that the structure meets building codes, zoning, and safety requirements and is legally fit to live in. The general contractor usually handles the inspections needed to get it, but the responsibility for having it in hand sits with you. Without a CO, the lender will not release the final draw or convert the loan.
Once everything clears, the lender reconciles the budget, releases any remaining retainage, and closes out the construction line. If you have a construction-to-permanent loan, the balance automatically rolls into an amortizing mortgage and you begin paying principal and interest; you sign modification or closing documents setting the permanent rate and the first payment date. If you have a construction-only loan, you need to close on a separate mortgage to pay off the construction balance, which means a second closing and a second set of closing costs.
If the Project Runs Long
Construction loans have a hard expiration, usually 12 to 18 months. If the build runs past it, you have to ask the lender for an extension, and extensions are not free.
Expect administrative or processing fees, and the lender may require a new appraisal or inspection to confirm current value and progress. If market rates have risen since you closed, the lender can adjust your rate upward for the extension period. That means a higher interest rate on a larger drawn balance for more months than you planned, and the extra cost compounds fast.
A denied extension is the worst case. If the lender will not extend and you cannot pay off the balance or refinance elsewhere, the full loan can be called due on a half-finished house. Building a schedule cushion and keeping a contingency reserve of at least 10% of the construction budget absorbs the delays nearly every project runs into.
Interest Deductibility During the Build
Interest you pay on a construction loan may qualify for the home mortgage interest deduction, but the IRS puts specific limits on it. A home under construction can be treated as a qualified home for up to 24 months, with the clock starting the day construction begins, and the home has to become your main residence once it is ready for occupancy. If it does not, the interest will not qualify.1Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
The standard cap applies: interest is deductible on up to $750,000 of mortgage debt, or $375,000 if married filing separately, and construction loans count toward that limit. On a larger loan, only the interest attributable to the first $750,000 qualifies.1Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
If the build takes longer than 24 months, interest paid after that window closes is generally not deductible as home mortgage interest. Talk to a tax professional if you are building on land you bought separately or financing the project through more than one loan.