Construction Loan Draw Schedules: How Interest Actually Accrues

Here's the thing every ground-up builder learns, usually the expensive way: on a construction loan, you don't pay interest on the loan amount — you pay interest on what you've drawn. The loan funds in stages as work completes, your balance climbs draw by draw, and so does your monthly interest. Model the carry as a flat number on the full loan and you'll overstate your costs; model it as a flat number on nothing in particular — which is what most flip calculators silently do, if they model it at all — and your budget is fiction in either direction.

This is the math. It's not hard; it just has to be done month by month.

How a draw schedule works

A construction lender doesn't wire the full loan at closing. They fund an agreed draw schedule tied to milestones — a typical residential build might look like: lot/closing draw, foundation, framing ("dried-in"), mechanicals rough-in, drywall/interior, and a final completion draw. At each milestone, an inspection confirms the work, the lender funds that draw, and your outstanding balance steps up.

Two consequences follow immediately. First, your interest cost depends on the timing pattern of the draws, not just their sum. Second, delays are expensive in a specific, computable way: a slow month late in the project — when most of the loan is drawn — costs far more interest than a slow month early on.

The interest math, month by month

Each month's interest is:

Interest(month) = Drawn Balance at that month × (Annual Rate ÷ 12)

A worked example, with deliberately round numbers. Suppose a $400,000 construction loan at 10% annual (0.8333%/month), drawn as: Month 1 — $80,000 · Month 3 — $100,000 (balance $180,000) · Month 5 — $120,000 (balance $300,000) · Month 7 — $100,000 (balance $400,000) · payoff at Month 9.

Walking the balance: months 1–2 accrue on $80k, months 3–4 on $180k, months 5–6 on $300k, months 7–9 on $400k. Total interest ≈ (80,000×2 + 180,000×2 + 300,000×2 + 400,000×3) × 0.008333 ≈ $19,333.

Now the two wrong flat models: full-balance-whole-term says $400,000 × 9 × 0.8333% = $30,000 — overstated by more than a third. "Half the loan for the term" says $15,000 — understated by 22%. Neither error is small, and neither is necessary, because the month-by-month version takes five minutes. And notice the delay math the schedule makes visible: an extra month at the end costs $3,333; an extra month at the start would have cost $667. Late delays are five times as expensive on this deal — that's not a vibe, it's the balance curve.

Interest reserves, points, and the rest of the carry

Many construction loans fund interest from an interest reserve — a budget line inside the loan that pays the monthly interest so you're not writing checks mid-build. Convenient, and still your money: the reserve is drawn funds, it accrues interest itself, and if the project runs long the reserve runs out first. Size it off the month-by-month schedule above, with your delay scenario, not off a guess.

The full carry picture for a ground-up deal adds: points at closing (on the full commitment, typically), taxes and insurance (builder's risk) through the build, utilities, and — the line everyone models last and pays first — the land carry between purchase and vertical start. Every one of these scales with time, which is why the single most valuable input in a build model is an honest schedule.

Draw structures, inspection requirements and reserve sizing are set by your lender, not by this article.

Frequently asked questions

Do you pay interest on the full construction loan?

No — interest accrues on the drawn balance only. Your monthly interest starts small and steps up with each funded draw, which is why the timing of draws matters as much as their total.

What is a typical construction draw schedule?

Commonly 4–7 draws tied to milestones — closing/lot, foundation, framing, mechanical rough-in, drywall/finishes, completion — each released after inspection. The exact structure is set in your loan agreement.

What is an interest reserve on a construction loan?

A budgeted portion of the loan that the lender draws from to pay your monthly interest during the build. It's still borrowed money accruing interest, and it's sized to your expected schedule — so a schedule overrun can exhaust it.

How do delays affect construction loan interest?

Proportionally to your drawn balance at the time. A delay near completion — when most of the loan is drawn — costs several times more per month than the same delay early. The month-by-month model shows you exactly how much.