A construction loan generally costs 2% to 5% of the project budget in lender fees, plus interest that currently runs about 7.75% to 9.25% on funds already drawn, plus a down payment of 20% to 30% for conventional loans. So how much a construction loan costs in practice depends on three things: the fees your lender charges to originate and service the loan, the interest that accrues while the home is being built, and how much cash or land equity you bring to closing.
Upfront Fees at Closing
The origination fee is the largest single charge. It typically runs 1% to 2% of the loan commitment, so on a $400,000 project you can expect $4,000 to $8,000. This fee compensates the lender for underwriting that goes beyond a normal mortgage review, since the lender also has to evaluate construction plans, the builder, and projected property value.
You will also pay for a subject-to-completion appraisal, which values the finished home based on plans, specs, and comparable properties rather than an existing structure. That appraisal usually costs $600 to $1,200. Application and credit report fees add another $300 to $700, and these are generally non-refundable whether or not the loan closes.
If you take a two-close loan, most of these fees repeat when you refinance into the permanent mortgage, including a second appraisal.
Interest During Construction
Construction loans carry variable interest rates tied to the prime rate. As of early 2026, the Wall Street Journal Prime Rate is 6.75%. Lenders add a margin of roughly 1% to 2.5% on top based on your credit score, down payment, and the project’s risk profile, putting most current rates between 7.75% and 9.25%. Strong applicants with large down payments can sometimes negotiate a tighter spread.
You do not pay interest on the full loan balance during the build. Draws release money to the builder in stages, and interest is calculated only on what has actually been disbursed. If your $500,000 loan has released $100,000 for the foundation and framing, interest accrues on that $100,000. Payments grow as the project advances.
Credit score matters directly here. A borrower at 760 might get a 1% margin, while a 680 score can push the margin above 2%. Over a twelve-month build, that spread adds thousands of dollars in carrying cost.
Rate Locks and Float-Down Options
Because construction can take six to eighteen months, some lenders let you lock the permanent rate at the start. Extended locks are commonly offered for 120, 180, 270, or 360 days, each with a lock-in fee that varies by lender. A one-time float-down option, usually available within 60 days of closing, lets you reset to a lower market rate if rates fall during the build. If construction runs past your lock expiration, extending it costs another 0.25% to 1% of the loan amount.
Down Payment and Cash Reserves
Conventional construction lenders typically require 20% to 30% of the total project cost up front. On a $500,000 build, that is $100,000 to $150,000 in cash or equity before fees.
Land equity can count. If you already own the lot free and clear, its appraised value is treated as your contribution. An $80,000 lot on a $400,000 project supplies a 20% stake and can satisfy the down payment on its own.
Government-backed programs lower the upfront cash significantly:
- FHA one-time-close loans allow 3.5% down with a credit score of 580 or higher, or 10% down with a score as low as 500.
- VA construction loans allow zero down for eligible veterans and active-duty service members, subject to a funding fee of 2.15% of the loan amount for first-time use with less than 5% down, 3.3% for subsequent use, 1.5% with 5% or more down, and 1.25% with 10% or more down. The fee can be financed into the loan, which preserves cash but adds interest cost over time.
- USDA construction loans require no down payment in eligible rural areas if you meet the income and location guidelines.
On top of the down payment, lenders usually want to see liquid reserves after closing. Fannie Mae’s automated underwriting sets no minimum reserve on a one-unit primary residence, but individual construction lenders commonly require two to six months of projected payments in savings or investments, and they will verify it from statements.
Costs During the Build
Before releasing each draw, the lender sends an inspector to confirm the work is done. Inspections run $150 to $250 each, and a typical project needs five to ten of them, so cumulative inspection cost lands somewhere between $750 and $2,500. Some lenders roll these into the loan; others bill as work progresses.
You also need builder’s risk insurance during construction, because a standard homeowner’s policy does not cover a structure being built. It protects against fire, storms, vandalism, and theft of on-site materials, and premiums generally run $1,000 to $2,500 a year depending on project size, location, and coverage limits. Homeowner’s insurance kicks in once the home is complete.
Contingency Reserve
Many lenders require a contingency reserve held in escrow to cover surprises like lumber price spikes, site conditions, or inspector-required changes. When required, it is typically 5% to 10% of the construction budget. Not every lender mandates one. USDA construction-to-permanent loans, for instance, permit up to 10% but do not require a reserve if the borrower and lender decide the project does not need it. Unused funds are usually applied to loan principal or returned to you.
Closing Costs
Construction closings look similar to a home purchase. Title insurance runs 0.5% to 1% of the property value and, for a construction loan, usually needs endorsements covering mechanic’s liens (claims that unpaid contractors or suppliers can file). Those endorsements add to the base premium.
Recording fees are often under $100. Transfer taxes vary widely by state and county, from negligible to several tenths of a percent of the loan amount.
One-Close Versus Two-Close
The loan structure changes your total more than almost any other choice. A one-time-close (construction-to-permanent) loan combines the construction financing and the permanent mortgage into a single transaction: one application, one appraisal, one closing, one set of closing costs. When the home is finished, the loan converts to a standard mortgage automatically.
A two-time-close loan splits these into two transactions. You close on a short-term construction loan first, then apply for and close on a permanent mortgage separately. That means paying closing costs twice, including duplicate appraisal, title, and origination fees, which can add $5,000 to $15,000 depending on the loan size. The tradeoff is flexibility: you can shop for a better permanent rate after the build wraps up, which could save money if rates drop, but you also risk not qualifying if your finances change during construction.
One-close loans sometimes carry a slightly higher interest rate during the construction phase, since the lender is locking in the permanent terms months ahead. For most borrowers, that premium is smaller than the second round of closing costs on a two-close.
What Delays Add
Construction rarely finishes on time. Weather, permits, materials, and subcontractor scheduling all push timelines. If you run past your original loan term, extensions typically cost 0.25% to 1% of the loan balance, or $1,000 to $4,000 on a $400,000 loan, and interest keeps accruing on the outstanding balance during the extra time. Extensions come in 30-, 60-, or 90-day increments depending on the lender.
Building schedule cushion into the original term is usually cheaper than paying a formal extension later. If the lender offers a choice between a 12-month and an 18-month construction period, the longer term costs slightly more in interest but avoids the steeper extension fee.
A Sample Total on a $400,000 Project
For a $400,000 conventional construction loan, expected fees look roughly like this:
- Origination fee (1%–2%): $4,000–$8,000
- Appraisal: $600–$1,200
- Application and credit fees: $300–$700
- Inspection fees (5–10 draws): $750–$2,500
- Title insurance (0.5%–1%): $2,000–$4,000
- Builder’s risk insurance: $1,000–$2,500
- Recording fees and transfer taxes: $100–$1,500
That totals roughly $8,750 to $20,400 in fees, or about 2% to 5% of the project cost, before interest and any contingency reserve. Interest on a 12-month build at 8.5%, calculated on an average outstanding balance of $200,000, adds around $17,000 in carrying costs. A two-close structure adds a second round of most of these fees. FHA, VA, and USDA borrowers trade some conventional charges for program-specific ones like the VA funding fee, which can be financed into the loan.