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Construction Interest Carry Calculator
Construction interest doesn't accrue on the full loan commitment — only on what's drawn. A $300K construction loan with draws hitting over 8 months costs much less than 8 months of interest on $300K. This calculator uses a draws-weighted average balance to size true carry cost during the construction period.
55-60% typical for even draws
Total construction interest
$10,267
Monthly interest
$1,283
Average outstanding balance
$154,000
Carry as % of loan
3.67%
Interest reserve needed
$7,700
Reserve coverage %
75%
How the math works
On a $280K loan at 10% for 8 months with 55% average balance: average balance $154K × 10%/12 = $1,283/mo interest × 8 months = $10,267 total carry — 3.7% of loan. An interest reserve of 6 months at $1,283 = $7,700 covers most of the construction.
Using the full-commitment method would have estimated $280K × 10% × 8/12 = $18,667 — almost 2x reality. Draws-weighted is the honest number. Use it when underwriting the deal and building the budget.
How to Use
- Enter total construction loan amount and interest rate.
- Enter the draw schedule by month — how much is outstanding at each month.
- The calculator applies interest-only monthly charges to the average outstanding and sums to total carry.
Frequently Asked Questions
How do lenders charge interest?
Monthly interest-only on the outstanding balance. Payment due 15-30 days after the end of each month. When a draw is made mid-month, interest for that month applies to the new balance from the draw date forward (often prorated). Lenders usually issue a monthly statement so the borrower knows the carry.
Should I include interest reserve in the budget?
Yes. Most construction lenders require an 'interest reserve' built into the loan — often 6-9 months of projected carry. This keeps monthly out-of-pocket at zero during construction. At project completion, unused reserve reduces payoff; fully used reserve is expected.
What's a reasonable average balance?
If draws are even across the build, average balance is ~50-60% of total. Front-loaded draws (land purchase at day 1) push this to 65-75%. Back-loaded (mostly finish-phase) drop it to 40-50%. Running a month-by-month balance model beats rules of thumb for accuracy.
Does construction interest capitalize?
Often yes — interest is added to loan balance rather than paid monthly. This makes the balance grow during construction and increases the payoff number. Not free money; it just defers the cash outlay to payoff/refi time. Factor this into the exit math.
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