Are construction loans interest only?
Yes, construction loans are interest-only for the entire term, usually 12 to 24 months, with interest accruing only on the funds drawn so far and typically paid from an interest reserve built into the loan. Principal is not paid down during the build; the full balance is repaid at maturity by a permanent loan or a sale.
Why construction loans are interest-only
The property produces no income during the build, so a lender cannot expect amortizing payments. The loan is a temporary advance against the finished value, and the lender is paid off when the property becomes a permanent asset. Interest-only keeps the carrying cost as low as possible while the balance grows with each draw.
How the payments work
| Phase | Balance | Payment |
|---|---|---|
| Month 1 | Land advance plus first draw | Interest on that amount only |
| Mid-build | Growing with each draw | Interest on the drawn balance |
| Completion | Full loan amount | Interest on the full amount |
| Lease-up or sale period | Full loan amount | Interest on the full amount until payoff |
Most lenders fund an interest reserve from the loan so these payments are made automatically. When the reserve runs out, payments come from your cash.
A worked example
$1 million loan at 11 percent, drawn evenly over twelve months:
- Month 1 payment: roughly $760 (interest on about $83,000)
- Month 6 payment: roughly $4,600
- Month 12 payment: roughly $9,200
- Total interest over the build: about $55,000
If lease-up takes three more months on the full balance, add about $27,500.
What is not in the payment
No principal. No escrow for taxes and insurance with most construction lenders, so you pay those directly. Draw fees and inspection fees are billed separately or deducted from draws.
At the end of the term
The full balance is due. The exit is a permanent loan, such as a DSCR loan for a rental, a bank loan for an owner-occupied building, or an agency loan for larger multifamily, or a sale. A bridge-to-perm or construction-to-permanent loan converts automatically when the property meets the lender's tests, which removes the refinance step.
Planning the reserve
Size the interest reserve for the build plus lease-up plus a cushion. A six-month reserve on a nine-month build is a common surprise. Keep three months of interest in your own accounts as a backstop.
How CommFi handles it
Our lending desk sizes the interest reserve to your schedule and prices the exit at the same time, so the payoff is planned before the first draw. It funds direct when it fits, and when a construction-to-permanent lender is the better fit, the desk searches a database of 7,000+ lenders and the ones that offer it compete for the file. Zero upfront fees.
Related reading
Related questions
- Are construction loans interest-only?
- Yes, for the entire term. Interest accrues on funds drawn so far and principal is repaid at maturity by a permanent loan or sale.
- Do I make payments during construction?
- Usually the interest reserve inside the loan makes them. When it is exhausted, you pay from cash.
- Is interest charged on the full loan amount?
- With most lenders, only on the drawn balance, which makes early months cheaper.
- What happens when the construction loan matures?
- The full balance is due. You refinance into a permanent loan, sell, or convert under a construction-to-permanent structure.
- Are taxes and insurance included in the payment?
- Usually not. Most construction lenders do not escrow, so you pay them directly during the build.
Property developer and licensed appraiser. 22+ years in real estate: TIC conversions, multi-unit redevelopments, mixed-use, fix and flips, commercial DSCR.