1. What is Construction Loan Interest?

Construction loan interest is the monthly cost of borrowing funds for a construction project. Unlike traditional mortgages, interest is typically paid only on the amount drawn (outstanding balance) during the construction phase.

2. How Does the Calculator Work?

The calculator uses the simple interest formula:

Where:

• \( Outstanding\ Balance \) — Current loan balance in dollars
• \( Rate \) — Annual interest rate in decimal form
• \( 12 \) — Number of months in a year

Explanation: The formula calculates monthly interest by converting the annual rate to a monthly rate and applying it to the current balance.

3. Importance of Interest Calculation

Details: Accurate interest calculation helps borrowers understand their monthly payment obligations during construction, plan cash flow, and compare different loan options.

4. Using the Calculator

Tips: Enter the current outstanding balance in dollars and the annual interest rate in decimal form (e.g., 0.05 for 5%). All values must be valid (balance > 0, rate between 0-1).

5. Frequently Asked Questions (FAQ)

Q1: Why divide by 12 in the formula?
A: The division converts the annual interest rate to a monthly rate since construction loan interest is typically calculated monthly.

Q2: How often does the outstanding balance change?
A: In construction loans, the balance increases as funds are drawn for construction progress, so interest calculations should be updated accordingly.

Q3: Is this simple or compound interest?
A: This calculates simple monthly interest. Some loans may compound, but construction loans typically use simple interest during the construction phase.

Q4: When is interest typically paid?
A: Most construction loans require monthly interest-only payments during construction, with the principal due at completion.

Q5: How does this differ from mortgage interest?
A: Construction loan interest is based on draws rather than full loan amount, and rates are often higher due to the higher risk of construction loans.