What interest rate do construction loans charge?
Construction loans typically charge prime plus 1 to 2.5 percent at banks and 9 to 13 percent at private lenders, always interest-only and usually only on the funds drawn so far, plus one to three points at closing. Because the balance grows through the build, the effective interest over a twelve-month project is roughly half of what the full loan would cost for a year.
Typical pricing
| Lender type | Rate | Points | Best for |
|---|---|---|---|
| Bank or credit union | Prime plus 1 to 2.5 percent, variable | 0.5 to 1.5 | Experienced sponsors with deposits and history |
| Debt fund or private lender | 9 to 13 percent | 1.5 to 3 | First projects, speed, flexible experience requirements |
| SBA 504 construction (owner-user) | Bank rate on the construction phase, fixed CDC rate at completion | Program fees | Buildings your own business will occupy |
Ranges vary by lender and move with the index.
Interest on drawn funds
Interest accrues on the amount advanced to date, not the full commitment. On a $1.2 million loan drawn evenly over twelve months at 11 percent, total interest is about $66,000 rather than $132,000. The interest reserve is sized on that curve, which is why it is smaller than a flat calculation suggests.
The interest reserve
Most construction lenders fund an interest reserve from the loan so you do not make payments from cash during the build. It is sized for the construction period plus lease-up and is itself part of the loan, so it accrues interest. When it runs out, payments come from your pocket.
What moves the rate
- Leverage. 65 percent of cost prices lower than 85 percent.
- Experience. A completed comparable project is the biggest discount.
- Asset type. Single-family and small multifamily price lowest; hospitality, special-purpose, and land-heavy projects price highest.
- Pre-leasing or pre-sales. Signed leases or contracts lower the risk and the rate.
- Recourse. Full personal guarantees price lower than limited recourse.
Fees beyond the rate
- Draw inspection fees: $150 to $400 per draw.
- Budget and plan review: $1,000 to $3,000.
- Appraisal with as-completed value: $2,000 to $5,000.
- Extension: a half to one point if the build runs long.
- Legal: higher than a permanent loan because of the construction agreements.
A worked example
$1.2 million private construction loan, 11 percent, two points, twelve-month build with even draws, then a two-month lease-up before refinance:
- Interest during build: about $66,000
- Interest during lease-up on the full balance: about $22,000
- Points: $24,000
- Inspections, review, appraisal: about $8,000
- Total: about $120,000, or 10 percent of the loan over fourteen months
How CommFi handles it
Our lending desk prices bank and private options side by side, with the interest reserve sized to your schedule. It funds direct when it fits, and when a bank or a specialist fund is the better fit, the desk searches a database of 7,000+ lenders and the ones that build in your market compete on rate. Zero upfront fees.
Related reading
Related questions
- What interest rate do construction loans charge?
- Prime plus 1 to 2.5 percent at banks; 9 to 13 percent at private lenders. Both are interest-only.
- Do I pay interest on the whole construction loan from day one?
- With most lenders, no. Interest accrues on funds drawn so far, so early months are cheaper.
- Are construction loan rates fixed?
- Bank rates are usually variable, tied to prime. Private lender rates are usually fixed for the term.
- What is an interest reserve on a construction loan?
- Loan funds set aside to pay the interest during construction and lease-up, so you do not make payments from cash.
- How much do points cost on a construction loan?
- One to three points at closing is typical, with banks at the low end and private lenders at the high end.
Property developer and licensed appraiser. 22+ years in real estate: TIC conversions, multi-unit redevelopments, mixed-use, fix and flips, commercial DSCR.