Interest-Only Construction Payments: How to Forecast Your Monthly Carry

On most investor construction loans, you pay interest only, and often only on the money that has actually been drawn. Payments start small and climb as the build moves forward. No principal is paid down during construction, so the full balance is due when you sell or refinance.

The simple formula

Monthly interest equals the drawn balance times the annual rate, divided by 12. If your lender calculates interest on actual days in the month, the number will move slightly from month to month, but this formula is close enough for planning.

Some lenders charge interest on the full loan amount from day one instead of just the drawn balance. Ask which method applies, because it changes your carrying cost a lot. Ask too whether an interest reserve is available, meaning loan funds set aside to cover interest during the build. RSC Private Lending can build a full interest reserve into New Construction loans.

Why payments grow over time

A build follows a draw schedule. Early on, only the land portion and maybe the foundation are funded. By the time drywall and finishes are going in, most of the loan is out. Your monthly payment follows that curve.

Build a month-by-month forecast

Map your expected draws against the construction schedule, then calculate interest for each month.

Example (illustrative numbers only): A $420,000 loan at 11%, with land funded at closing.

• Months 1 to 2: $100,000 drawn. Interest about $917 a month.
• Months 3 to 5: $220,000 drawn. About $2,017 a month.
• Months 6 to 8: $340,000 drawn. About $3,117 a month.
• Months 9 to 10: $420,000 drawn. About $3,850 a month.

Total interest over 10 months: roughly $24,900. Add two months for a slow sale or lease-up at the full balance, and that is $7,700 more. That also brings the timeline to month 12, which would use the entire term on a 12-month loan such as RSC's New Construction program.

Plan for the long tail

The most expensive months are at the end, when the balance is highest and the home is not yet sold or rented. Any delay, from a late inspection to a slow lease-up, adds a full-balance month. That is why a carrying-cost cushion matters, whether it is an interest reserve or cash you hold, and why a realistic schedule is worth more than an optimistic one.

What this means for you

Do not budget a single flat payment. Build a month-by-month interest forecast from your draw schedule, add a few months of padding at the full balance, and make sure that padding fits inside your loan term. Interest is a real project cost, so include it in your total budget when you judge whether the deal works.

Planning the timeline for your next build? Send RSC Private Lending your scenario for a term sheet in 24 hours. All loans are business-purpose and subject to underwriting.