Construction Loan Calculator

Building a home or commercial structure requires critical financial planning, informed decision‑making, and ongoing management. A construction loan differs from a traditional mortgage: it disburses funding in stages as the work is completed, and then permanently converts to a mortgage once construction is finished.

In this article, we will cover:

• What a Construction Loan Calculator Is
• How It is Calculated & What Formula Is
• A Simple Worked Example

What a Construction Loan Calculator Is

A Construction Loan Calculator is an online tool that estimates your monthly payment, total amount repaid, and total interest based on three inputs

• Loan Amount — The total principal amount you borrow (e.g,. $80,000).
• Annual Interest Rate — The interest rate on the loan, expressed as a percentage you pay each year (e.g., 5%).
• Term (Years) — The number of years over which the loan is repaid.

How It Is Calculated — Formula

The formula behind the calculator can be difficult to compute by hand. Here is standard amortization formula:

$$$ M=P\frac{\frac{r}{12}(1+\frac{r}{12}{)}^{12t}}{(1+\frac{r}{12}{)}^{12t}-1}$$$

Where:

P = Loan principal,

r = annual interest rate as a decimal (e.g. 6% → 0.06),

t = term in years.

Now, we will walk through an example to gain a deep understanding of how the system works behind this calculator. Keep reading!

A Simple Worked Example

Imagine you plan to construct a property and you borrow $120,000 at an annual interest rate of 5% for 2 years. Here is how to compute those values to determine your monthly payment.

• Loan Amount = P = $120,000
• Annual Interest Rate = r = 5% or 0.05,
• Term (Years) = t = 2 years

Now let's compute the values:

$$$ P=\$120,000$$$ $$$ r=0.05$$$ $$$ t=2$$$

Total number of monthly payments:

$$$ 12t=24$$$

Monthly interest rate:

$$$ \frac{r}{12}=\frac{0.05}{12}\approx 0.0041667$$$

Monthly Payment Calculation:

$$$ M=P\frac{\frac{r}{12}(1+\frac{r}{12}{)}^{12t}}{(1+\frac{r}{12}{)}^{12t}-1}$$$ $$$ M=\$120,000\times \frac{0.0041667(1.0041667{)}^{24}}{(1.0041667{)}^{24}-1}$$$ $$$ M\approx \$5,263.27$$$

Finally:

Monthly Payment (M): $5,263.27

Total Paid Over 2 Years: $5,263.27 × 24 = $126,318.48

Total Interest Paid: $126,318.48 − $120,000 = $6,318.48

You will pay $5,263.27 per month for 2 years, repaying $126,318 in total—of which $6,318 is interest.