How to Calculate Construction-to-Permanent Loan Cost (With Real Numbers)

What a Construction-to-Permanent Loan Actually Is

A construction-to-permanent loan is a single financing instrument with two sequential phases. Phase one covers the build period, typically 9 to 18 months. Phase two converts automatically into a standard amortizing mortgage, usually a 30-year fixed or 15-year fixed, once the certificate of occupancy is issued.

The borrower pays one set of closing costs instead of two separate loan closings. That single-close structure saves $3,000 to $6,000 in fees on average. But it does not eliminate construction-phase carrying costs. Those costs are separate and must be calculated independently.

Phase 1: Calculating Construction-Phase Interest

Construction-phase interest is charged only on the outstanding drawn balance, not the full approved loan amount. Lenders release funds in draws tied to completed milestones: foundation poured, framing complete, mechanicals rough-in, and so on.

The formula for each monthly interest charge is:

(Outstanding Drawn Balance x Annual Interest Rate) / 12 = Monthly Interest Payment

Because the drawn balance grows with each disbursement, interest expense rises through the build. You need to model every draw to get an accurate number.

Worked Example 1: $400,000 Construction Loan at 7.5%

Assume the following draw schedule over 12 months:

• Month 1: $80,000 drawn (permits, mobilization, foundation)
• Month 4: Additional $120,000 drawn (framing, roofing)
• Month 7: Additional $100,000 drawn (mechanicals, insulation, drywall)
• Month 10: Final $100,000 drawn (finishes, fixtures, punch list)

Monthly interest by period:

• Months 1 to 3: $80,000 x 7.5% / 12 = $500/month, total $1,500
• Months 4 to 6: $200,000 x 7.5% / 12 = $1,250/month, total $3,750
• Months 7 to 9: $300,000 x 7.5% / 12 = $1,875/month, total $5,625
• Months 10 to 12: $400,000 x 7.5% / 12 = $2,500/month, total $7,500

Total construction-phase interest: $18,375

A borrower who estimated interest on the full $400,000 from day one would have projected $30,000 in interest payments. A borrower who ignored construction interest entirely would have been blindsided by $18,375. Neither approach is acceptable for sound planning.

Phase 2: Loan Fees and Closing Costs

Single-close construction-to-permanent loans carry one closing event, but that closing bundles fees for both phases. Expect the following charges:

• Origination fee: 0.5% to 1.5% of the total loan amount
• Construction administration fee: $500 to $1,500 flat
• Draw inspection fees: $150 to $300 per inspection, typically 4 to 6 inspections
• Appraisal (as-completed value): $600 to $900 for new construction
• Title insurance and recording: $1,200 to $2,500 depending on state
• Prepaid interest and escrow setup: varies by close date

On a $400,000 loan with a 1% origination fee, the closing cost total typically runs $8,500 to $11,000. Add that to the $18,375 in construction-phase interest and the pre-conversion cost of the loan reaches $26,875 to $29,375 before a single permanent mortgage payment.

Phase 3: The Permanent Mortgage Payment

After the construction phase closes out, the full loan balance converts to a standard amortizing mortgage. If the borrower drew all $400,000, the permanent loan balance is $400,000 at the locked rate.

The standard monthly payment formula for a fixed-rate mortgage is:

M = P x (r(1+r)^n) / ((1+r)^n - 1)

Where P = principal, r = monthly interest rate (annual rate / 12), n = number of payments.

Worked Example 2: $400,000 at 7.25% Fixed for 30 Years

• P = $400,000
• r = 7.25% / 12 = 0.6042%
• n = 360 payments

Monthly payment = $2,729.56

Over 30 years, total payments equal $982,641.60. Total interest paid on the permanent phase is $582,641.60. Adding the construction-phase interest of $18,375 and closing costs of $9,750 (midpoint estimate), the full lifecycle cost of this loan is approximately $610,766.60 above the principal.

That is the number worth modeling before signing a loan commitment.

The Rate-Lock Question

Construction-to-permanent loans typically lock the permanent rate at closing. On a 12-month build, locking in at today's rate eliminates refinancing risk. But it also eliminates the chance to capture a lower rate if the market moves down.

Some lenders offer a float-down option at 0.25% to 0.5% of the loan amount. On a $400,000 loan, that option costs $1,000 to $2,000. If rates drop 50 basis points during the build, the float-down saves $1,138 annually on a 30-year term at the rates in the example above. The breakeven on the float-down fee is less than 18 months.

What Changes If You Borrow Less Than the Full Approved Amount

If the project comes in under budget and you draw only $360,000 of a $400,000 approved construction loan, the permanent mortgage converts at $360,000. Monthly payment drops from $2,729.56 to $2,456.60. Over 30 years, that $40,000 in undrawn principal saves $98,740.80 in total interest.

Accurate cost control during construction is not just a project management issue. It directly determines the 30-year cost of the permanent loan.

How to Put All Three Phases Together

The total cost calculation follows this sequence:

1. Build a draw schedule with estimated milestone dates.
2. Apply (Outstanding Balance x Rate / 12) to each monthly period.
3. Sum all monthly interest charges for total construction-phase interest.
4. Add all closing costs: origination, administration, inspections, appraisal, title.
5. Calculate the permanent monthly payment using the amortization formula.
6. Multiply the permanent payment by 360 (or 180 for a 15-year term).
7. Add steps 3, 4, and step 6 result for total loan lifecycle cost.

This sequence gives a complete picture of what the loan actually costs, not just what the monthly payment is after conversion.

Run Your Numbers in the CalcMoney Mortgage Calculator

The variables in a construction-to-permanent loan interact in ways that make back-of-envelope math unreliable. A $20,000 change in the draw schedule, a 25-basis-point rate move, or a two-month delay in completing a milestone each shifts the total cost meaningfully.

The CalcMoney Mortgage Calculator lets you model draw timing, rate scenarios, and loan term comparisons against real dollar outputs. Enter your construction budget, expected draw schedule, quoted rate, and loan term. The calculator returns both the construction-phase carrying cost and the full amortized payment schedule.

Use it before accepting a loan commitment, not after.

Open the CalcMoney Mortgage Calculator and model your construction-to-permanent loan →

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Results are estimates for informational purposes only. Consult a licensed financial professional before making financial decisions.