To calculate interest-only construction loan payments, multiply the current outstanding balance by a daily interest rate, then multiply by the number of days in the billing period. The daily rate is your annual rate divided by either 360 or 365, depending on which convention your lender uses. A $150,000 balance at 7% on a 360-day basis over a 30-day month works out to $150,000 × 0.00019444 × 30 = $875.00. That is the whole payment. No principal, no escrow during the construction phase, just the cost of borrowing the funds that have actually been drawn.
The complication is that your balance keeps changing. Lenders release funds in stages tied to construction milestones, so each new draw bumps the balance and the payment goes up with it. You only pay interest on money that has actually been disbursed, which means every month the math starts from a different number.
What You Need Before You Calculate
Three figures drive the calculation: the current outstanding balance, the annual interest rate, and the number of days in the billing cycle. Miss any one and your figure will not match the lender’s statement.
The outstanding balance is the sum of all draws funded so far. Each draw is tied to a completed milestone; your builder submits a draw request with documentation, and the lender releases funds only after reviewing it.1Mastt. Construction Draw Guide: Steps, Docs, and Best Practices The current figure sits on your most recent monthly statement or the lender’s online portal, labeled as outstanding or principal balance. Do not confuse it with the total loan commitment, which is the full amount you could eventually borrow.
The annual rate appears in your closing package in the Truth in Lending Act disclosures. Federal regulation requires creditors to present the annual percentage rate clearly and in writing before the loan closes. For construction loans that convert to permanent financing with the same lender, the creditor may provide a single combined disclosure or two separate sets covering each phase.2Consumer Financial Protection Bureau. 12 CFR Part 1026 – 1026.17 General Disclosure Requirements Either way, the rate is stated explicitly.
The billing cycle length sits in the payment terms section of your promissory note. Most construction loans bill monthly, but the start and end dates matter because different months have different day counts, and the day count flows straight into the formula.
Converting the Annual Rate to a Daily Factor
Lenders do not charge interest by the month. They calculate a daily rate and count days. To get the daily rate, divide your annual rate by either 360 or 365. The interest calculation section of your promissory note spells out which convention applies, so check there before dividing.
The 360-day convention, sometimes called the bank method, is common in commercial lending. It produces a slightly higher daily rate than the 365-day method because you are dividing by a smaller number. Short-term U.S. dollar instruments commonly use a 360-day year.3ACT Learning. How to Calculate Interest in 360-Day and 365-Day Years The gap looks tiny on any single day, but across a twelve- to eighteen-month build it adds real dollars.
The conversion itself is simple. Take a 7% annual rate as a decimal (0.07) and divide by 360:
0.07 ÷ 360 = 0.00019444
Using the 365-day convention instead:
0.07 ÷ 365 = 0.00019178
Keep the daily factor to at least six decimal places so your figure matches the lender’s accounting. The factor stays constant as long as the rate itself does not change.
Variable Rates and Rate Resets
Most construction loans carry a variable rate tied to a benchmark index plus a fixed margin. The dominant benchmark today is the Secured Overnight Financing Rate, which stood at roughly 3.66% as of early March 2026.4Federal Reserve Bank of St. Louis. Secured Overnight Financing Rate (SOFR) For construction-to-permanent mortgages indexed to SOFR, the margin added on top typically runs between 1 and 3 percentage points.5Freddie Mac Single-Family. SOFR-Indexed ARMs If SOFR is 3.66% and your margin is 2.5%, your current rate is 6.16%.
Because the index can move during a build, you need to recalculate the daily factor whenever your rate resets. Check your note for the reset schedule and whether the rate adjusts monthly or at longer intervals. Some agreements include an interest rate floor, a minimum below which the rate cannot fall regardless of the index. If your floor is 5.5% and index plus margin drops to 5%, you still pay 5.5%, and that floor becomes the practical bottom of your daily factor.
Running the Monthly Calculation
With a daily factor and the current balance in hand, the formula is one line:
Monthly Interest = Outstanding Balance × Daily Rate × Days in Billing Period
The $150,000-at-7% example from the opening gave $875.00 for a 30-day month. A 31-day month on the same balance comes to $904.17. February at 28 days drops it to $816.67. The day count is doing real work, so always use the actual number of days in the billing cycle rather than defaulting to 30.
Handling Draws That Fund Mid-Month
Construction draws rarely land on the first day of a billing period. When a new disbursement hits mid-cycle, split the month into pieces and run the formula on each piece separately.
Suppose you start the month with a $150,000 balance and a $50,000 draw funds on day 16 of a 30-day cycle. The first 15 days accrue interest on $150,000. The remaining 15 days accrue interest on $200,000:
- Days 1 through 15: $150,000 × 0.00019444 × 15 = $437.50
- Days 16 through 30: $200,000 × 0.00019444 × 15 = $583.33
- Total for the month: $437.50 + $583.33 = $1,020.83
If multiple draws fund on different dates within the same month, add a segment for each funding event. The principle does not change. Interest accrues only on the balance actually outstanding on each day; you are not paying anything on money still sitting in the lender’s account waiting for the next inspection.
A simple log with each draw’s date, amount, and running balance keeps this arithmetic manageable. When the bank statement arrives, compare your segment totals against the line items. Discrepancies of more than a few cents usually mean a draw posted on a different date than you expected, or the lender used a different day count. Either way, a quick call to loan servicing is worthwhile.
How Payments Grow Over the Construction Timeline
A typical build involves four to six major draws, each releasing 15% to 25% of the loan commitment. For a $400,000 loan at 7% on a 360-day basis with 30-day months, the payment trajectory runs something like this:
- After Draw 1 ($80,000 outstanding): $466.67 per month
- After Draw 2 ($160,000 outstanding): $933.33 per month
- After Draw 3 ($280,000 outstanding): $1,633.33 per month
- After Draw 4 ($400,000 outstanding): $2,333.33 per month
The payment roughly triples between the first and last draws. That jump catches borrowers off guard, particularly if they are also paying rent or an existing mortgage during construction. Running these projections before breaking ground, using your actual draw schedule and rate, is the single most useful thing you can do to avoid a cash crunch halfway through.
Delays make it worse. Every extra month at peak balance means another payment at the highest level. If the project runs over and you need a loan extension, lenders commonly charge an extension fee as a percentage of the loan amount for each additional 30-day period. Budget at least one extra month of peak-balance interest as a cushion.
If Your Loan Has an Interest Reserve
Some construction loans include an interest reserve, a portion of the total commitment set aside specifically to cover monthly interest during the build. Instead of writing a check each month, the lender draws from this reserve to pay the interest, and the reserve balance shrinks accordingly. The reserve is funded from the loan proceeds themselves, so you are effectively borrowing the money that pays the interest on the money you are borrowing.
Lenders typically estimate the reserve this way: take half the total loan amount, multiply by the annual rate, divide by 12, then multiply by the expected number of construction months. The 50% figure approximates the average outstanding balance over the life of the project, since you start near zero and end near the full commitment.
Even with a reserve in place, the per-month calculation is the same formula on the same balance. The only difference is where the payment comes from. One practical consequence: your effective borrowing power for actual construction costs is reduced by the reserve amount. A $500,000 loan with a $30,000 interest reserve only puts $470,000 toward bricks and labor. And if the build runs long enough to drain the reserve, you start making interest payments out of pocket, so a timeline cushion matters here too.
Checking Your Statement Against Your Own Math
The whole point of running the formula yourself is to verify the bank’s work. When the monthly statement arrives, pull up your draw log and recalculate each segment of the billing period. Match the balance, the rate, and the day count. If the lender uses the 360-day convention and you divided by 365, the numbers will not reconcile, and that mismatch is the most common source of confusion.
Rounding differences of a few cents are normal. Larger discrepancies usually trace to one of three causes: a draw posted on a date different from what you expected, a rate adjustment you missed, or a fee added to the balance. Lenders typically charge an inspection fee before releasing each draw, and while these are often paid separately, some lenders capitalize them into the loan balance. If your balance is higher than the sum of your draws, that is a likely reason.
Catching errors during the construction phase matters beyond the current statement. On a single-close loan that converts to a permanent mortgage, any discrepancy that slips through becomes part of the starting principal of your long-term loan. A small overage now compounds into real money over decades.