Construction loans are pricey and complicated. Most people have no clue what they’re getting into until they’re already committed. We’ll cover what construction loans actually cost, all the fees involved, and some ways to keep expenses down when you’re building.
So, How Much Are Construction Loans?
So you want to know how much are construction loans? Fair warning – they cost way more than regular home loans. Banks charge premium rates because they’re basically lending money on a house that doesn’t exist yet. Makes sense when you think about it.
Regular mortgages might run you 7% right now. Construction loans? You’re looking at anywhere from 8.5% to 12%, sometimes even higher if your credit isn’t great or you’re building something unusual. The bank sees empty land and construction plans, not a finished house they can easily resell if things go sideways.
But here’s the thing that trips people up – you don’t get all that money upfront like a regular loan. They give it to you in chunks as your house gets built. So at least you’re not paying interest on the full amount right away.
How These Interest Payments Actually Work
The payment setup is weird compared to normal loans. Let’s say you get approved for $400,000. When they pour your foundation and that costs $60,000, you only pay interest on that sixty grand. Next month when framing is done and they release another $80,000, now you’re paying interest on $140,000 total.
Your payments start small and keep growing every month. By the time you’re finishing up, you might be paying interest on the whole loan amount. Some folks get caught off guard by this – their payment in month one might be $450, but by month ten it’s $2,800.
Most construction loans are interest-only during building, which helps keep payments manageable. But once construction wraps up, you need permanent financing or your loan converts to a regular mortgage with principal and interest payments.
Down Payments That’ll Make You Wince
Forget about putting down 5% or 10% like you might on a regular house. Construction loans want serious money upfront – usually 25% to 30% of your total project cost. Some banks want even more if you’ve never built before.
Building a $500,000 house? You need $125,000 to $150,000 cash just to get started. That’s before you pay for anything else. And unlike regular home purchases where you might get help with down payment programs, construction loans don’t usually have those options.
Banks want this much money down because there’s more risk involved. If something goes wrong during construction, they want to know you’ve got serious skin in the game and won’t just walk away.
All the Fees Nobody Warns You About
The interest rate is just the beginning. Construction loans come loaded with fees that add up fast. Here’s what you’re probably going to pay:
Origination fees run 1% to 3% of your loan amount. Borrow $350,000 and you might pay $3,500 to $10,500 just to get the loan. Then there’s appraisal fees, usually around $800 to $1,200 because they need to figure out what your finished house will be worth.
Inspection fees are the ones that really get annoying. Every time you need money released for the next construction phase, the bank sends someone out to make sure work got done properly. These inspections cost $300 to $700 each time, and you’ll probably need 8 to 12 of them during construction.
Draw fees hit you every time money gets released – anywhere from $100 to $400 per draw. Title insurance, credit checks, and other miscellaneous fees can add another $2,000 to $4,000 to your total.
Two Different Types, Two Different Headaches
You’ve got two main choices for construction loans, and both have trade-offs.
Construction-only loans might have slightly better rates during building, but when construction finishes, you’re scrambling to get permanent financing. That means another loan application, more fees, another closing, and more stress when you should be enjoying your new house.
Construction-to-permanent loans cost a bit more during building but automatically turn into regular mortgages when construction’s done. No second loan application, no additional closing costs, no scrambling around. For most people, this ends up being the smarter choice even with the higher rate.
Getting Approved Isn’t a Walk in the Park
Banks are picky about construction loans. Your credit needs to be solid – most want scores of 680 or higher, though some will work with lower scores if everything else looks good. Your income needs to be stable and verifiable, and they want to see you’ve got cash reserves beyond your down payment.
If you’ve never built before, expect extra scrutiny. They’ll want detailed construction plans, contractor references, proof of licensing and insurance, and sometimes they’ll even want to approve your contractor choice. The whole approval process can take 60 to 90 days, so start early.
Your debt-to-income ratio needs to be reasonable – most banks want it under 45%. And they’re going to verify everything, so have your financial documents organized and ready.
Where You Build Matters for Costs
Location makes a big difference in what you’ll pay. Big cities with lots of banks competing usually have better rates than small towns with limited options. The difference can be substantial – sometimes a full percentage point or more.
Local building requirements affect costs too. Some areas require specific types of foundations for homes based on soil conditions or local codes. These requirements can impact both your construction budget and how banks view your loan application.
Market conditions in your area matter as well. Hot construction markets might mean tighter lending and higher rates, while slower areas might offer better terms to attract borrowers.
Your Material Choices Actually Matter
Banks have opinions about how you build your house. Stick with conventional construction methods and materials, and you’ll have an easier time getting approved and might get better rates. Get too creative or unusual, and banks get nervous.
If you’re comparing modular vs manufactured homes, know that banks generally prefer site-built construction. Modular homes are viewed more favorably than manufactured homes, but traditional construction usually gets the best terms.
Material choices like brick vs wood house construction can affect your loan too. Banks consider durability and resale value when setting terms. Solid choices like the best material to build a house from a longevity standpoint often get favorable treatment.
Timing Your Construction Project
When you start building affects your costs. Weather delays cost money since you’re paying interest longer than planned. Starting construction during good weather months reduces delay risks, though you might pay more for contractors during busy seasons.
Material availability has become a bigger issue lately. Supply chain problems can stretch construction timelines and increase your interest costs. Building some buffer time into your schedule helps manage these risks.
Most construction projects take longer than planned. Budget for at least 20% more time than your contractor estimates, and plan for the additional interest costs that come with delays.
Ways to Keep Costs Down
Shop around for lenders. Construction loan rates can vary significantly between banks, credit unions, and specialty lenders. The difference between 8.5% and 9.5% might not sound like much, but over 12 months of construction, it adds up.
Improve your financial profile before applying. Higher credit scores, lower debt ratios, and more cash reserves typically qualify for better rates. Even small improvements can save money.
Work with experienced contractors who have good relationships with lenders. Banks prefer working with builders they know and trust, and this can sometimes translate to better terms for you.
Keep your project moving efficiently. Delays cost money in interest charges. Stay involved in the construction process and maintain good communication with your contractor to avoid unnecessary slowdowns.
What You’ll Actually Pay – Real Numbers
Here’s an example of what construction financing might cost on a $450,000 build requiring a $112,500 down payment.
Let’s say you get a 9.5% construction loan over 12 months. Your interest costs might run $18,000 to $25,000 depending on how quickly money gets drawn. Add a 2% origination fee ($6,750), inspection fees ($4,200 for 12 months), draw fees ($1,200 for 8 draws), and other costs ($2,500), and you’re looking at around $32,650 in total loan expenses.
That’s roughly 7% of your total project cost just for financing. It’s a significant expense that needs to be factored into your building budget from the start.
Making Smart Decisions
Don’t just look at interest rates when comparing loans. A loan with a higher rate but lower fees might cost less overall, especially for shorter construction timelines.
Consider your long-term plans. If you’re building your forever home, paying extra for a construction-to-permanent loan might make sense to avoid refinancing hassles later.
Factor in your risk tolerance. Fixed rates provide predictability, while variable rates might start lower but can change during construction.
Getting Your Project Ready
Realistic budgeting is crucial. Include all financing costs in your project budget, not just construction expenses. Build in contingency funds for both cost overruns and timeline extensions.
Having detailed construction plans and specifications helps with loan approval and can sometimes improve your terms. Banks like seeing well-thought-out projects with experienced contractors.
Research your material and construction method choices thoroughly. Contact Sky Root to discuss your construction project and financing options. We’ll help you build your dream home while keeping financing in your budget.