How much interest do you pay on a construction loan while the house is being built?

Published September 28, 2026

The number on your disclosure is an estimate built on a fixed assumption

Regulation Z, the federal Truth in Lending rule, tells lenders how to estimate interest on a multiple-advance construction loan. If interest is charged only on amounts advanced, the lender assumes that one-half of the commitment is outstanding at the contract rate for the entire construction period. On a $400,000 commitment at 7% over 12 months, that works out to $200,000 × 7% = $14,000.

Your real interest can land above or below that. Say the same loan pays out $100,000 at the start of months one, four, seven and ten. Monthly interest is about $583 for the first three months, about $1,167 for the next three, $1,750 after that, and about $2,333 in the last quarter. The year's total comes to $17,500, or $3,500 more than the disclosure estimate, because the money went out early and the average balance was $250,000 instead of $200,000. A contract that pays the builder later in the job pulls the number the other way. Daily interest accrual and variable rates also move it, so treat this as an illustration of the mechanics.

When the builder gets paid is set by the construction contract, which is covered in the guide to contracts, allowances and change orders.

One closing or two

The construction phase and the permanent mortgage can be handled as one transaction or as separate ones under Regulation Z. For single-closing construction-to-permanent loans that Fannie Mae buys, the Selling Guide sets hard limits:

• No single construction period longer than 12 months, and no more than 18 months in total. Fannie Mae grants no exceptions; a longer build has to be processed as a two-closing loan.
• Fannie Mae won't buy the loan until construction is complete and the loan has converted to permanent terms.
• After conversion, the term can't exceed 30 years, not counting the construction period.
• The appraisal can be no more than four months old at the construction loan closing. At completion the appraiser files an update and completion report (Form 1004D), and if value has dropped, the lender needs a new appraisal and has to requalify the borrower.
• The loan amount can go up at conversion only to cover documented increases in construction cost.

A build that runs past 18 months can't stay a single-closing loan under these rules. The guide to building timelines covers how long projects usually take.

If you already own the lot

Fannie Mae requires the borrower to hold title to the lot. What matters for the math is whether you're the owner of record when the first construction advance is made. If you are, the loan-to-value ratio is the loan amount divided by the as-completed appraised value of the lot and house. If you aren't, it's divided by the lower of that appraised value or the purchase price, meaning construction cost plus the lot's sale price. Owning the land first lets its appraised value, not what you paid for it, count toward the ratio.