When Do You Start Making Payments on a Construction Loan?

When building a new home, understanding the payment schedule for a construction loan is essential, as it operates differently from a standard mortgage. Unlike a traditional home loan where funds are disbursed in a single lump sum, construction loans have a unique structure. Payments are tied directly to the project’s progress, meaning the timing and amount of payments evolve as the home is built.

The Nature of Construction Loan Payments

Construction loans finance new property builds by providing funds in stages, known as “draws.” The lender releases portions of the approved loan amount as specific construction milestones are met, such as foundation completion or framing erection. This method ensures funds are available only as needed for ongoing work, aligning the loan with the project’s physical progress.

During construction, borrowers typically make interest-only payments. This covers only the interest accrued on disbursed funds, not the principal. As more funds are drawn for labor and materials, the outstanding loan balance and monthly interest-only payment increase. This structure helps manage costs during the building period, especially if the borrower is also paying rent or another mortgage.

Payment Milestones During Construction

Payments on a construction loan typically begin shortly after the initial draw. Once the first funds are disbursed for costs like permits or site work, interest starts accruing. The borrower’s first payment is then due, calculated on this initial drawn balance.

As construction progresses, additional draws are requested and approved, increasing the outstanding loan balance. Each draw leads to a higher monthly interest-only payment. For example, after the foundation is poured, framing completed, or roof installed, an inspection verifies progress, triggering another draw and a recalculation of the next payment. Common milestones include:

Completion of the foundation
Framing
Exterior finishes
Mechanical systems (plumbing, electrical, HVAC)
Interior finishes

Transition to Permanent Financing

Once home construction is complete and final inspections pass, the construction loan transitions into a long-term mortgage. The borrower then begins making full principal and interest (P&I) payments on the entire loan amount, similar to a traditional home loan. This marks the end of the interest-only phase and the start of amortizing the full balance over a set period, often 15 or 30 years.

This transition can occur in two ways. A “construction-to-permanent” loan (single-close loan) converts automatically into a traditional mortgage after construction, requiring one closing. Alternatively, a “two-time close” loan involves two separate transactions: the initial construction loan is paid off with funds from a new, separate permanent mortgage, necessitating two sets of closing costs.

Factors Influencing Payment Timing

Several factors beyond the draw schedule influence payment timing. Loan agreement terms and lender policies dictate when the first payment is due after a draw. Some lenders may offer a short grace period, while others require payment almost immediately.

Construction delays also impact the overall timeline of draws and the interest-only payment period. Unforeseen issues like weather, material shortages, or labor availability can prolong construction. This extension means the borrower continues interest-only payments longer than anticipated, potentially affecting the project budget.