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Construction loans are short-term loans that help pay for building a home in stages instead of all at once. During construction, you'll only have to pay interest for 12 to 18 months. After that, when your home is finished, you'll switch to a regular mortgage. To get one of these loans, you need to put down at least 20%, have detailed plans for the construction, and use builders that the lender has approved. Rates are usually 1% to 2% higher than those on regular mortgages.
I've been in the mortgage business since I was 18, and I can tell you that even experienced buyers still have trouble with construction loans. Last week, I helped a couple in the Dallas-Fort Worth area who thought that building their dream home would be the same as getting a regular mortgage. Not really.
It can be hard to find the right house, like looking for a needle in a haystack. You look at a lot of properties, but they all lack something important. Maybe the style isn't right for you, the location isn't right for your family, or the layout just doesn't work for you. You might be wondering if your dream home even exists after months of looking.
The good news is You can make it if you can't find it. That's where construction loans come in.
A construction loan is a type of loan that is meant to help you pay for the costs of building a custom home from the ground up. A construction loan pays for the building of your property, while a traditional mortgage pays for something that already exists.
The main difference is that with a normal mortgage, the lender gives you money to buy a finished house that acts as collateral from the start. There is no house yet with a construction loan. You're basically asking a lender to trust that your builder will make something valuable enough to pay back the loan. That's why these loans have different terms and conditions and are harder to get.
A traditional mortgage is like buying something that is already made. You see it, you want it, you buy it. Getting a construction loan is more like ordering a custom piece. The Consumer Financial Protection Bureau says that construction loans usually last 12 to 18 months, while regular mortgages last 15 to 30 years.
When you close on a regular mortgage, you get the whole amount at once. Your monthly payments start right away and include both the principal and the interest. You're paying off the loan from the start.
Instead, construction loans work on a draw schedule. As construction moves forward, the lender gives out money in stages. During the building phase, which can take anywhere from 10 to 16 months depending on how complicated the project is, you'll only have to pay interest on the amount that has already been given out. You haven't started paying down the principal yet because you don't live in the house yet.
This is one of the better things about construction loans, if you ask me. Your payments stay pretty low while the house is being built, which is good because you might still be paying rent or another mortgage somewhere else.
Let me be honest with you about the costs. There's no way around it: construction loans cost more than regular mortgages.
According to data from the Federal Housing Finance Agency, conventional mortgage rates for qualified borrowers are around 6.5% to 7.25% as of October 2025. Loans for building? You're looking at rates that are usually 1 to 2 percentage points higher, which puts most borrowers in the 7.5% to 9% range. Some lenders will even push higher based on your financial situation and how risky they think the project is.
Why the extra cost? Construction loans are riskier for lenders. There isn't any property to appraise right now. The builder could have problems. Costs might be higher than expected. Delays due to weather happen. Problems with the supply chain come up. The lender is taking on a lot more risk than if they were financing a home that had already passed inspection.
The fees for a construction loan are higher than the closing costs for a regular mortgage. This is what you usually see:
These fees add up quickly, to be honest. I tell my clients to set aside an extra $10,000 to $15,000 on top of their down payment just for closing costs and loan-related fees.
People don't talk about this in those fancy magazines about building homes. You can't just get a big check and start building with a construction loan. The money is released in stages based on the progress of the construction. You, your builder, and your lender all need to work together carefully during this process.
This is how a normal draw schedule works:
Some lenders make fewer draws, while others make more. The percentages change based on the lender and the project. But the rule is still the same: you only get paid when the work is done and checked.
Not every construction loan works the same way. One type might make a lot more sense than the others, depending on your situation.
These short-term loans are only for the building period, which is usually 12 months but can be as long as 18 months. You need to get a traditional mortgage to pay off the loan when the construction is done.
What's the good thing? Some people who borrow money like to keep the building phase separate from the long-term mortgage. A construction-only loan lets you shop around for better terms on your permanent financing if you think your credit score will go up during construction or if you think rates might go down.
The bad thing? You have to pay closing costs twice: once for the mortgage and once for the construction loan. You also run the risk of not being able to get permanent financing when the building is done. Your financial situation may have changed, or the rules for lending may have gotten stricter. I've seen borrowers get stuck in this situation, and it's not good.
The U.S. says The Department of Housing and Urban Development says that as of mid-2025, construction-only loans make up about 23% of custom home financing. This is down from 31% in 2020. Most people who borrow money now prefer construction-to-permanent loans because they are more certain.
This is the most common choice, and for good reason. Once your home is finished, a construction-to-permanent loan automatically changes from construction financing to a regular mortgage. When you close on the construction loan, you lock in the rate on your permanent mortgage.
You only have to pay closing costs once. You only have to apply once. You set your rate once. Most borrowers like how easy it is, especially in places like Dallas-Fort Worth where I work with clients a lot. People don't want to go through underwriting twice if they don't have to.
Even if rates go up while the house is being built, the interest rate you lock in for the permanent mortgage stays the same. If you get a construction-to-permanent loan at 7.25% and rates go up to 8.5% while you're building, you'll still get 7.25% when you switch to the mortgage. If rates go down, though, you're stuck with your original rate unless you refinance later.
You only have to pay interest on the money you get during the construction phase. After the building is done and the loan changes, your payments will be regular principal and interest payments based on the length of your mortgage, which can be 15 or 30 years.
The Department of Veterans Affairs backs construction loans for active-duty service members and veterans. There are some big benefits to these loans compared to regular construction loans.
VA data from 2025 says that VA construction loans need:
What's the catch? Not all lenders offer VA construction loans because they are harder to manage. You will also need to hire a builder who is approved by the VA, and the property must meet the VA's minimum property requirements. If you qualify for VA benefits, this can save you tens of thousands of dollars compared to regular construction loans.
Not really a construction loan, but worth noting because a lot of people get the two mixed up. You can't use an FHA 203(k) loan to build a new home; it's only for buying an existing home and fixing it up.
The Federal Housing Administration backs these loans, which lets people buy a home and pay for the repairs with one mortgage. You can use 203(k) financing for anything from small repairs to big changes, like adding rooms, changing the structure, or completely remodeling the inside of your home.
If your credit score is 580 or higher, you only need to put down 3.5% for an FHA 203(k) loan. They also let borrowers have higher debt-to-income ratios than regular loans, which makes them available to more people. You can't use 203(k) loans to pay for luxury improvements like swimming pools or outdoor kitchens, but the renovations must cost at least $5,000.
Fannie Mae's HomeStyle Renovation loan and Freddie Mac's CHOICERenovation loan do the same thing for regular borrowers. These can help you buy a home with a down payment as low as 3% and can pay for up to 75% of the value of the home after it has been fixed up.
Some people who borrow money want to be their own general contractor and hire subcontractors directly instead of hiring a builder to do everything. There are owner-builder loans for this situation, but they are harder to find and harder to get.
Most lenders who offer owner-builder loans want to see that you have experience and a license in construction, detailed project management plans, proof of relationships with qualified subcontractors, and extra money to cover 6 to 12 months of expenses.
Most lenders won't even think about giving you an owner-builder loan unless you work in construction or have successfully managed a building project before. Lenders charge higher rates and have stricter requirements for owner-builders because they know that owner-builders fail more often than projects that use professional general contractors.
An end loan is just a regular mortgage that you get after the building is done. If you paid for the building in cash or are finishing a construction-only loan, you will need to apply for an end loan to pay off the construction loan and get permanent financing.
What's the good news? The process for getting an end loan on a newly built home is the same as for any other mortgage. Your credit score, income, debt-to-income ratio, and the appraised value of the home all affect your eligibility and rate. It doesn't matter if the house is brand new or 10 years old; getting a mortgage is the same amount of work.
Let me show you what lenders want from people who want to get a construction loan. Because of the extra risk, the bar is higher than with regular mortgages.
Most lenders for construction loans want to see a credit score of at least 680. If your score is 700 or higher, you'll get the best rates. The average credit score for people who were approved for a construction loan in 2025 was 721, according to the CFPB's consumer finance data.
This is a lot higher than the 620 minimum needed for regular mortgages or the 580 minimum needed for FHA loans. Some lenders may work with scores between 620 and 679, but you should expect to pay much higher interest rates and make a larger down payment.
You should plan to pay at least 20% of the total cost of the project. Some lenders want 25% or even 30%, especially if your credit isn't great or if you're making a custom design that might not be very popular when you sell it.
You need to put down $80,000 to $100,000 on a project that costs $400,000. That's a lot of money that needs to be available and sourced. Before you apply, lenders want to see that you have money in your bank account for at least 60 to 90 days. Big deposits that show up out of nowhere are suspicious and need a lot of paperwork.
VA construction loans are different because they sometimes let qualified veterans build with no money down.
Most lenders want your debt-to-income ratio to be less than 43%, but some construction loan lenders want it to be 40% or lower. Your DTI is the ratio of your monthly debt payments to your gross monthly income.
Let's say you make $8,000 a month before taxes. Your total monthly debts, which include your new mortgage payment, car loans, student loans, credit cards, and other bills, shouldn't be more than $3,440. It can be hard to get a construction loan if you already have a lot of debt.
The paperwork for a construction loan is much more complicated than that for a regular mortgage. You will need:
Your lender has to give the builder the green light. This isn't just a simple stamp of approval. The lender will check to see if the borrower has the right licenses and permits from the state and the city, as well as liability insurance and workers' compensation coverage. They will also check the borrower's financial stability, experience with similar projects, and references from previous clients and lenders.
Most lenders won't lend to your uncle who flips houses on the weekends if he wants to build your custom home. They want to work with professional builders who have a good track record, the right licenses, and enough insurance.
Okay, let's be honest for a minute. Most people don't think this process will take as long as it does. You can expect the whole process, from choosing a builder to closing on your construction loan, to take three to six months. Make plans accordingly.
Talk to at least three to five builders. Ask them about their past work on projects like yours, how long it usually takes to build, how they deal with change orders and cost overruns, their warranty and support after the project is done, and for references from recent clients.
Look at those references. Really call them. Ask them about how well they communicated, if the project stayed on budget, how the builder dealt with problems, and if they would hire this builder again.
Based on these plans, your builder should give you a detailed budget with line items. This budget needs to cover all costs, from preparing the site to putting in the final landscaping. Good builders set aside 10% to 15% of the total cost for unexpected costs.
Look at the interest rates, fees, draw schedule processes, and requirements for builders. Inquire about their usual time frame from application to closing. Some lenders for construction projects move quickly, while others take a long time.
The lender will also look over all of your construction paperwork and often send it to their own appraiser or construction consultant for review.
Be ready for questions. Be ready to get requests for more documents. This is normal. The underwriter might ask about some budget line items or ask for new estimates.
Your construction-to-permanent loan locks in your permanent mortgage terms, even though the conversion won't happen for another 12 to 18 months. Make sure you know what the terms are for both the construction phase and the permanent mortgage.
This is where it gets interesting. Even if you hired a general contractor to run the construction, you're not just a borrower anymore; you're a project manager.
Your builder sends in paperwork showing finished work before each draw request. The lender sends an inspector to check that the work is done and meets standards. The lender will only release the next draw after the inspection is approved.
This makes a quality control system that works on its own. Builders know they won't get paid until the work passes inspection, so they have an incentive to do a good job. But it can also cause stress if inspectors don't respond quickly or if there are disagreements about whether the work meets standards.
Most lenders give you the money within three to five business days of approving the inspection. Some are faster than others. Before you choose a lender, ask about how long it usually takes to process a draw. This is especially important if your builder has a tight cash flow.
You'll pay interest only on the total amount disbursed so far every month during construction. Your monthly payment goes up a little bit each time a new draw comes out.
For example, you might have an 8% interest rate on a $400,000 construction loan. Your monthly interest after the first draw of $60,000 is $60,000 times 8% divided by 12, which comes out to $400.
After the second draw, which gave out $140,000, the monthly interest is $140,000 times 8% divided by 12, which is $933.
At the last draw, when the full $400,000 was paid out, the monthly interest was $400,000 times 8% divided by 12, which is $2,667.
Your payments are still a lot lower than they will be when you switch to the permanent mortgage. For a 30-year loan, the monthly payment for principal and interest would be about $2,935. But you should plan for payments that will go up over time as the building goes up.
Even with the best planning, construction can be delayed. The National Association of Home Builders says that in 2025, the average custom home will take 14.2 months to build, up from 11.3 months in 2019. Delays in the weather, problems with permits, and problems with the supply chain all add to the time it takes to finish.
If construction takes longer than planned, most construction loans let you extend the loan for one time. This usually adds three to six months to the loan term and may cost between $500 and $1,500. If you need more than one extension, you should expect to pay more and possibly have higher interest rates.
Cost overruns are even harder to deal with. If the cost of building is more than your loan amount, you will have to pay the difference out of your own pocket. That extra money in your budget? This is what it is for. A lot of builders say that you should keep an extra 10 to 20% of your loan amount in reserves just in case you have to pay for something unexpected.
Once the building is finished and you get your certificate of occupancy, the conversion takes place. If you have a construction-to-permanent loan, your construction loan turns into a regular mortgage.
The lender asks for a final appraisal of the finished house. If the appraisal comes back at or above the expected value, the conversion happens automatically. Your interest-only payments stop, and you start making regular payments on the principal and interest based on the rate and terms of your loan.
What if the appraisal is low? Things start to get tricky here. If your finished home is worth less than you thought it would be, you might need to bring more money to the closing to meet the lender's loan-to-value ratio. This doesn't happen very often if the first budget was realistic, but it does happen.
People who build for the first time almost always don't know how much it will cost. That pretty kitchen you saw at your friend's house? It cost more than you think it did. The cabinets you ordered? Also costs more. What about the landscaping? Yes, that too.
Be honest when you make your budget, and then add 15 to 20% for emergencies. That's great if you stay under budget. If not, you're safe.
The builder who charges the least is not usually the best. Don't worry about price; instead, look at quality, communication, and track record. If a builder doesn't communicate well or cuts corners, you'll spend more on stress and repairs than you would have saved by hiring them at a lower price.
It costs a lot of money to change your mind in the middle of building. If you add a change order later, it will cost 20 to 30% more than if you had included it from the start. Before you start building, make all of your design choices.
Because of the delays in construction, you're making interest-only payments for longer than you thought. They mean you have to pay rent or another mortgage for a few more months. They mean that your stress level stays high for a longer time. Pick builders who have worked on similar projects before, have realistic timelines, and get along well with subcontractors.
Some people who take out construction loans think they can use the money whenever they want and for whatever they want. That's not how it works. The builder gets the money directly based on the work that has been done. You never touch the money yourself. Know exactly how and when your lender will draw money from your account.
A full construction loan isn't right for everyone or everyone who needs one. Alternatives might work better for you, depending on your situation.
A cash-out refinance lets you use the equity in your land or home to pay for building or remodeling. You refinance your current mortgage for more than you owe and get the difference in cash.
Most conventional cash-out refinances let you borrow up to 80% of the value of your property, according to FHFA rules for 2025. If your property is worth $300,000 and you already have a $100,000 mortgage on it, you could refinance for $240,000, pay off the mortgage, and get $140,000 in cash for your project.
There are a number of benefits to cash-out refinances over construction loans. You get lower interest rates, an easier approval process, no need for builder approval, and no problems with the draw schedule.
The bad thing? You're adding to the balance of your mortgage on your current home, which you may still be living in while the work is being done.
A home equity loan or line of credit can help you build a home without the hassle of getting a construction loan if you own property with equity.
A home equity loan gives you a set amount of money at a set interest rate for a set amount of time, usually between 5 and 30 years. The Federal Reserve's consumer credit data from the third quarter of 2025 shows that the average interest rate on home equity loans for qualified borrowers is between 8.2% and 9.5%.
A HELOC is more like a credit card that is backed by the equity in your home. You can borrow money from a credit line for a set amount of time, usually 10 years, and then pay it back over a set amount of time, usually 10 to 20 years. As of October 2025, HELOC rates range from 8.5% to 10.2%.
Both options are good for big renovations on existing homes, small building projects like putting up a garage or workshop, and people who want to pay for their own construction and then refinance into a mortgage later.
Tax issues related to construction financing can be tricky, so I always suggest talking to a tax expert. But here are some important things to know:
IRS Publication 936 says that you may be able to deduct the interest you pay on a construction loan if the loan is secured by your primary or secondary residence, the construction takes less than 24 months, and you move into the home within 30 days of it being finished.
You can deduct the interest you paid even though you don't live in the house yet during the construction phase. Once you change to a permanent mortgage, the rules for deducting interest on mortgages taken out after December 15, 2017, for homes worth up to $750,000 apply.
You won't have to pay property taxes until the house is built and the value is set. Some places charge taxes on land while it is being built, and then they charge taxes again when the home is finished. It's clear that the property tax bill on a brand-new home worth $500,000 is higher than the taxes on the empty land it replaced.
Property tax rates in Texas, for instance, depend on the county and city, but they usually fall between 1.5% and 2.5% of the assessed value. If you buy a new home for $400,000 in some areas, you can expect to pay $6,000 to $10,000 in property taxes each year, depending on where you live.
Building your own home gives you a lot of chances to make exactly what you want. But getting money for construction is hard, costly, and needs a lot of planning and financial strength.
Construction loans are best for people who have good credit scores (700 or higher) and a steady income. People who have saved up at least 20% to 25% of the down payment. People who have done a lot of research on builders and designs. Buyers who know the risks and can deal with possible delays. Anyone who has looked at all the homes on the market and still hasn't found what they want.
If your credit score is below 680, think about other options. You don't have the 20% down payment you need. You don't like it when timelines and costs change. You haven't made up your mind about what you want in a design. You are a first-time homebuyer who doesn't know how construction works.
So here's the deal: if you can't find the right home to buy, construction loans can help you build the home of your dreams. Just be aware of the costs, how hard it will be, and how much time you'll need to put in.
Add 15 to 20% to your base construction costs to cover unexpected costs. Last year, I worked with a client who planned to spend $350,000 on their build but ended up spending $420,000. Costs for site prep that weren't expected, costs for better materials when they saw the options in person, and costs for supplies that went up during construction. It all added up quickly.
If you don't already own land, your budget needs to include the cost of preparing the site, connecting utilities, getting permits and paying fees, building costs, builder profit and overhead, a contingency fund, closing costs and loan fees, and landscaping and exterior work. Most people who build for the first time don't think about soft costs like permits, engineering, and impact fees. Depending on the area and the size of the project, permits and impact fees alone can cost between $30,000 and $60,000 in some markets.
According to the National Association of Home Builders, the average cost of building a custom home per square foot is between $150 and $250, depending on where it is and how nice it is. That doesn't count the land. Building a custom home with 2,500 square feet of space could cost anywhere from $375,000 to $625,000, not including the cost of land, site work, or financing.
Yes, technically, but I wouldn't suggest it unless you have real experience with construction. There are owner-builder loans, but they are hard to find and even harder to get. Lenders know that most owner-builders have problems, so they ask for proof of construction knowledge, bigger down payments, and more cash on hand.
Even if you're qualified, running your own construction project is like having a full-time job. You're in charge of a lot of things, like coordinating several subcontractors, ordering materials, dealing with permit inspections, keeping track of the schedule, and fixing problems. If one subcontractor is late, it messes up everyone else. Materials are delivered to the wrong place. Inspectors find problems that need to be fixed. If you don't have experience, you'll make costly mistakes.
The money you save by not paying a general contractor's 15% to 20% markup often goes to waste because of mistakes, inefficiencies, and the value of your own time. If you don't work in construction or have successfully managed a building project before, hire a professional general contractor. Your stress level and marriage will thank you.
You have to pay the difference yourself. The lender said yes to your loan after looking at your budget. If the actual costs are higher than that budget, you will have to pay the difference with your own money. That's why that emergency fund is so important.
If you're halfway through building and realize you're going to go over budget, you don't have many choices. If the appraised value supports it and you can afford the higher payment, some lenders might let you borrow more money. But don't count on it. More often than not, you'll need to lower the level of finish on the work that is left, get rid of some planned features, or bring in more money to make up for the difference.
NAHB surveys show that in 2024, about 32% of custom home building projects went over their budgets by at least 10%. Most of these cost overruns were caused by change orders, which usually cost 20 to 30% more than if those features had been included in the original plans.
Most custom homes will take 12 to 18 months from the time they start building to the time they get their certificate of occupancy. Simple, straightforward builds on easy sites could be done in 10 to 12 months. Complex designs, difficult sites, or areas with slow permit processing can stretch to 20 months or longer.
The timeline looks something like this. Site prep and foundation take 4 to 8 weeks. It takes 6 to 10 weeks to frame and roof. It takes 3 to 5 weeks to rough in the mechanics. It takes 4 to 6 weeks to put up insulation and drywall. It takes 8 to 12 weeks to finish the inside. It will take 2 to 4 weeks to finish and make a punch list. These timeframes are affected by the weather, the availability of materials, the scheduling of subcontractors, and delays in inspections.
According to the U.S. Census Bureau's Survey of Construction, the average time it took to build a new single-family home in 2025 was 8.5 months for production builders and 14.2 months for custom builders. Custom homes take longer because they have one-of-a-kind designs and higher-end finishes that need more time to get right.
Yes, when you close on the construction loan, you lock in your permanent mortgage rate. One of the best things about this type of loan is this. If rates are good right now, you can lock in that rate for the entire 12 to 18 month construction period, even if rates go up.
The rate lock for a construction-to-permanent loan usually lasts for the whole time the building is being built and the time it takes to convert it. Most lenders offer locks that last 18 to 24 months to fit with normal construction schedules. You might need to extend your lock if construction takes longer than your lock period. This usually costs money and may change the rate.
The bad news? If rates go down a lot while you're building, you'll have to keep your locked rate unless you want to refinance after you move in. That means you have to pay closing costs again. But most borrowers would rather know their rate for sure than take a chance on rate changes during construction.
Most construction lenders want to see a score of at least 680. If your score is 700 or higher, you'll get better rates and terms. The Consumer Financial Protection Bureau says that in 2025, the average credit score for people who were approved for a construction loan was 721.
That's a lot higher than the minimums for conventional mortgages (620) and FHA loans (580). Lenders take on more risk when they give out construction loans, so they ask for stronger credit profiles in return. Some lenders will work with scores between 620 and 679, but you should expect higher interest rates, which are usually 0.5 to 1.0% higher, and bigger down payments, which are 25 to 30% instead of 20%.
Before you apply for a construction loan, work on raising your credit score if it is below 680. Pay off your credit cards, make all of your payments on time, don't apply for new credit, and contest any mistakes on your credit reports. If your credit score goes up by 20 points, your interest rate will drop by about 0.25%. Over the course of a 30-year mortgage, this can save you thousands of dollars.
Yes, but they are handled differently than building on empty land. You need a renovation construction loan that covers both the demolition and the new construction if you're tearing down an old building and building a new one.
The lender will look at both the property's current value with the structure still standing and the value they expect it to have after it is rebuilt. A construction-only loan might be a good option for you if you own the property outright. If you already have a mortgage, you could refinance into a construction-to-permanent loan that pays off the old mortgage and pays for the demolition and rebuilding.
Tear-down projects are often more complicated. You need permission to tear down a building and to build a new one. You might need environmental assessments, especially if your home is old and has lead paint or asbestos. Zoning laws in your area may limit what you can build. You need to know how to get rid of demolition debris. Some cities have rules or higher fees for tearing down buildings, especially in historic districts or neighborhoods that want to keep their character.
Plan on spending $4 to $10 per square foot to tear down a building, depending on its size and any hazardous materials that need to be removed. It could cost between $8,000 and $20,000 to tear down and clear a 2,000-square-foot house.
Yes, and in some ways it's easier than getting a loan for both land and construction. If you already own the land free and clear, you're adding equity to the project. This lowers the lender's risk and may lower the amount of money you need to put down on the construction part.
The lender will need a current land appraisal to figure out how much it is worth. If your land is worth $100,000 and you need a $400,000 construction loan, the lender sees your project as a $500,000 total with built-in equity. Your land equity might count toward part or all of your down payment, depending on what the lender needs.
If you still owe money on the land, the construction loan will usually pay off the land loan and then pay for the building. This puts everything into one loan. Check to see if your current land lender charges prepayment penalties that would cut into your budget.
This is the worst thing that can happen to someone who takes out a construction loan, and it does happen. According to NAHB data, about 8 to 12% of construction companies go out of business every year. The failure rate is higher when the economy is bad or material costs go up.
Most lenders for construction projects require builders to have payment and performance bonds. These bonds protect the lender in case the builder doesn't finish the job. The bond company either finishes the job or pays the owner for the money they lost. But even with bonding, you will still have to deal with delays, stress, and maybe even extra costs.
Your loan documents for building should say what to do in this case. Usually, the lender will help you find a new builder to finish the job. They might also give the new builder the rest of the loan money or look over the project schedule and loan terms again. You may need to send in more paperwork that shows the new builder's qualifications, as well as a new budget and timeline.
This is why it's so important to do a lot of research on your builder before you start. Talk to their recent clients, check their bonding and insurance, and find out how long they've been in business. A builder who has been in business for 15 years or more and has strong financial backing is much less likely to go out of business in the middle of a project than a new company that is working on small margins.
Most of the time, construction loans cost 1 to 2 percentage points more than regular mortgage rates. If conventional mortgage rates are between 6.5% and 7.25% in October 2025, construction loan rates will be between 7.5% and 9% or higher, depending on your credit history and the lender.
The higher risk lenders take with construction loans is reflected in the rate premium. They are giving money for something that isn't real yet. The person who borrowed the money could run out of it while the project is still going on. The builder might not do a good job. The project could take longer than planned. The finished house might be worth less than expected. Because of all these risks, interest rates go up.
You're only paying interest on the money you get during the construction phase, so your monthly payments start out low and go up as you get more draws. If you locked in your construction loan rate at closing, the rate on your permanent mortgage may be the same. If you're getting new permanent financing for a construction-only loan, the rate may be different.
The Federal Housing Finance Agency keeps an eye on the average interest rates for different kinds of loans. In the third quarter of 2025, the average rate on a 30-year fixed mortgage was 6.89%, while the average rate on a construction loan was 8.34%, or 1.45 percentage points more.
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