To calculate interest on a construction loan, multiply the amount your lender has actually disbursed by the annual interest rate, divide by the number of days in the year your loan agreement specifies (usually 360 or 365), then multiply by the days in the billing period. The result is your interest-only payment for that month. Because the balance grows each time a new draw funds, the payment changes throughout the project, and the formula has to be rerun every billing cycle.
The Monthly Formula, Worked Out
Say your lender has disbursed $200,000 so far, your rate is 8%, your loan uses a 365-day year, and the billing period is 31 days.
- Annual interest: $200,000 × 0.08 = $16,000
- Daily interest (per diem): $16,000 ÷ 365 = $43.84
- Monthly payment: $43.84 × 31 = $1,359.04
That $1,359.04 is what you owe for the month. No principal comes down during construction. If the next month runs 30 days with no new draw, the payment drops to $1,315.07 for no reason other than the shorter calendar. If a $50,000 draw funds, the balance jumps to $250,000 and you run the same three lines again on the new number.
The formula never changes: drawn balance × annual rate ÷ days in year × days in billing period. What changes is the balance, and occasionally the rate.
The Three Numbers You Need
Every input lives somewhere in your loan documents. Knowing where to look saves a call to the lender.
The drawn balance is the total your lender has released to date, not the full approved loan amount. Each completed and inspected phase triggers a new draw that adds to the running balance. Your most recent draw confirmation or monthly statement shows the current figure.
The annual interest rate sits in your promissory note. Most construction loans are variable, tied to an index plus a lender-set margin. Prime is the common benchmark. As of early 2026, prime is 6.75%, so a loan priced at prime plus 1.25% carries an 8% rate. Because the rate floats, your interest cost can shift between draws even if you do nothing.
The day-count convention is tucked into the definitions section of the loan agreement. It tells you whether the annual rate is divided by 360 or 365 to get the daily rate. “Actual/365” uses real calendar days and a real-year divisor. “Actual/360” counts real calendar days but divides by 360, which produces a slightly higher daily rate.
Why 360 Versus 365 Matters
The gap looks small per day and adds up over a build. Same $200,000 balance at 8%:
- 365-day year: $16,000 ÷ 365 = $43.84 per day
- 360-day year: $16,000 ÷ 360 = $44.44 per day
Over a 31-day month, that 60-cent daily gap becomes about $18.60. Over twelve months on a balance that keeps rising, a borrower on the 360-day convention can pay several hundred dollars more than someone with the identical stated rate on a 365-day basis. The 360-day method is historically common in commercial and construction lending in the United States. Nothing about it is improper; it just means your effective rate runs slightly above the number on the note. Check which convention your agreement uses before you build any projection.
When the Rate Moves During the Project
Most construction loans adjust automatically when the underlying index moves. If your note reads “prime plus 1.25%” and prime shifts, your rate shifts with it, often without a separate notice. The next billing statement reflects the new rate.
Any projection you build at the start is an estimate. A half-point increase on a $300,000 drawn balance adds roughly $125 per month in interest. Across six remaining months of a twelve-month build, that is an extra $750 that was not in the plan. Running your projections under two or three rate scenarios shows you where the budget breaks. The Federal Reserve’s H.15 statistical release carries the current prime rate; combined with the margin on your note, that gives you your current rate at any point during the build.
Projecting Interest Across the Whole Draw Schedule
One month is arithmetic. The real question is what you will pay from the first shovel to the final walk-through. Each draw pushes the balance up, so interest costs accelerate as the project moves along.
A typical schedule releases funds in five or six stages tied to milestones. A common breakdown:
- Foundation and site work: about 20% of the loan
- Framing and roof: about 25%
- Mechanical and electrical rough-in: about 20%
- Drywall and interior finishes: about 20%
- Final completion: about 15%
To project cumulative interest, run the monthly formula for each period using the expected balance after each draw. A simplified run for a $400,000 loan at 8% on a 365-day year, drawn over ten months:
- Months 1–2: balance $80,000. Monthly interest roughly $539. Two months = $1,078.
- Months 3–4: balance $180,000. Monthly interest roughly $1,214. Two months = $2,428.
- Months 5–6: balance $260,000. Monthly interest roughly $1,753. Two months = $3,506.
- Months 7–8: balance $340,000. Monthly interest roughly $2,293. Two months = $4,586.
- Months 9–10: balance $400,000. Monthly interest roughly $2,696. Two months = $5,392.
Total estimated interest: roughly $16,990. A faster draw schedule front-loads costs and raises the total; a slower, more even schedule keeps early balances lower. You do not fully control the timing since it tracks construction progress, but seeing the relationship between draw speed and interest cost sets realistic expectations.
Contingency Draws
Builders often recommend holding back 5% to 10% of the project budget for material price jumps, weather damage, or design changes. If contingency funds get drawn, that amount joins the outstanding balance and starts accruing interest immediately. On a $400,000 loan, a $30,000 contingency draw late in the project adds roughly $200 per month in interest for the months that remain. Build the possibility into your projection rather than treating the contingency as free.
Interest Reserve Accounts Change the Math
Some lenders, especially on commercial construction loans, set up an interest reserve. Rather than you writing a check each billing cycle, the lender carves out part of the loan proceeds at closing and draws from that reserve to cover interest as it comes due. Convenient, but the reserve payments count as additional loan draws, which means interest accrues on the interest.
The Consumer Financial Protection Bureau’s guidance on multiple-advance construction loans requires the compounding effect to be reflected in the loan’s disclosures when a lender pulls interest from a reserve rather than letting the borrower pay directly.1Consumer Financial Protection Bureau. Appendix D to Part 1026 – Multiple Advance Construction Loans The CFPB’s own example: on a hypothetical loan, base interest on the construction draws comes to $1,093.75, and the compounding from the reserve adds another $23.93, for a total of $1,117.68.2Consumer Financial Protection Bureau. Official Interpretations – Appendix D – Multiple-Advance Construction Loans On a larger or longer project the premium is proportionally bigger. If your lender lets you choose between an interest reserve and paying out of pocket, paying directly avoids that compounding.
What a Delay Adds to the Total
Delays hit the interest bill from two sides. Every extra month of construction is another month of interest-only payments on a balance that is likely near its peak: on a $400,000 fully drawn balance at 8%, roughly $2,700 in interest per additional month. If the project runs past the original loan term, you also need an extension. Extension fees vary by lender but commonly run between 0.25% and 1% of the outstanding balance, and some lenders bump the rate on the extended portion. On a $400,000 balance, a 0.50% extension fee is $2,000. A two-month delay on a large project can easily add $7,000 to $8,000 in combined interest and fees. The extension terms, including whether the rate goes up and how many extensions the lender will grant, are in your loan agreement. Read that section before you need it.