| Detail | Explanation |
|---|---|
| Usual rate type | Floating, priced over prime or SOFR |
| Rate protection | Floors protect the lender, rate caps protect the borrower |
| Interest charged on | The drawn balance only, which grows as work is completed |
| How interest is paid | Usually from an interest reserve funded in the loan budget |
| Costs beyond the rate | Origination, draw inspections, lender legal, extension and exit fees |
What do the construction loan benchmarks look like today?
Construction pricing starts from a short-term index. Bank construction loans often float over the prime rate, and debt funds and many banks price over SOFR. The live table below shows the latest published values for both, along with the Treasury yields that will drive the permanent loan you refinance into.
Keep an eye on the 5-year and 10-year Treasury too. Those yields price the permanent takeout loan that has to repay the construction lender.
| Benchmark | Latest value | As of | A year earlier | What it prices |
|---|---|---|---|---|
| Secured Overnight Financing Rate (SOFR) | 3.85% | September 17, 2026 | 4.38% | Floating-rate bridge, construction, and debt fund loans |
| Bank prime loan rate | 7.00% | September 17, 2026 | 7.25% | Bank construction loans, lines of credit, and SBA 7(a) loans |
| 5-year U.S. Treasury yield | 4.78% | September 17, 2026 | 3.62% | 5-year fixed-rate bank, CMBS, and life company loans |
| 10-year U.S. Treasury yield | 4.94% | September 17, 2026 | 4.06% | 10-year fixed-rate CMBS, agency, and life company loans |
Source: Federal Reserve Bank of St. Louis, FRED. SOFR, DPRIME, DGS5, DGS10
How are commercial construction loan rates structured?
A construction loan rate has 3 parts. The index is prime or SOFR. The spread, sometimes called the margin, is the lender's price for the project risk. The floor sets a minimum on the index or on the full note rate so the lender keeps a minimum yield if rates fall.
Because the rate floats, every change in the index flows straight into the interest reserve. Some lenders require the borrower to buy an interest rate cap that limits how high the index can go. Others size a larger reserve instead.
A few structures fix the rate. A bank may offer a swap that converts the floating rate to a fixed rate, and some agency programs combine construction and permanent financing at a single fixed rate. Those structures trade flexibility for certainty and usually carry their own breakage or prepayment terms.
What moves the construction loan spread?
- Loan-to-cost. More sponsor equity ahead of the loan means less risk for the lender
- Pre-leasing or presales. Signed leases or contracts reduce the lease-up risk after completion
- Sponsor and contractor. Completed projects of the same type and size, and a contractor the lender has seen perform
- Contract type. A guaranteed maximum price contract shifts cost risk away from the lender
- Guarantees. Completion, carry, and repayment guarantees from a guarantor with real liquidity
- Asset type and market. Multifamily and industrial in deep markets usually price tighter than hospitality or specialty projects
- Takeout strength. A clear refinance or sale path at conservative numbers
What fees come with a construction loan?
Construction loans carry more fees than permanent loans because the lender manages the loan every month until completion. Ask for each item in writing before you compare term sheets.
| Cost | When it is paid | How it is measured |
|---|---|---|
| Origination fee | At closing | Percent of the total commitment, drawn or not |
| Draw and inspection fees | Each draw | Flat fee per draw or per site inspection |
| Construction consultant review | Before closing | Flat fee for plan and cost review |
| Lender legal and title updates | At closing and each draw | Actual cost |
| Unused commitment fee | Monthly or quarterly, if charged | Percent of the undrawn balance |
| Extension fee | When an extension is exercised | Percent of the loan balance or commitment |
| Exit fee | At payoff, if charged | Percent of the loan amount, sometimes waived for a refinance with the same lender |
How does the interest reserve change the cost?
The interest reserve is a line in the project budget that the lender draws each month to pay interest. It is borrowed money, so the borrower pays interest on the interest. It also counts toward the loan amount, which means a bigger reserve uses up leverage that could have paid for hard costs.
The reserve is sized from a draw schedule and an assumed rate. If construction runs late or the index rises, the reserve runs out early and the borrower has to fund the shortfall in cash. That risk is why lenders test the reserve at higher rates before closing.
Hypothetical example: all-in cost of a $20,000,000 construction loan
The example below is hypothetical. It uses round assumptions to show the math and is not a quote. Assume a $20,000,000 commitment made up of $18,000,000 for project costs and a $2,000,000 interest reserve. The loan funds $1,000,000 of costs a month for 18 months, then carries the property through 6 months of lease-up. Interest accrues monthly on the drawn balance and is paid from the reserve.
Assume a hypothetical SOFR of 3.50% plus a hypothetical spread of 3.50%, a 7.00% note rate. The second column assumes the index averages 1.00% higher over the term. Fees assume a 1.00% origination fee on the commitment, a $3,000 monthly draw inspection fee, and $60,000 of lender legal and third-party costs.
| Line item | 7.00% note rate | 8.00% note rate |
|---|---|---|
| Interest paid from reserve | $1,707,140 | $1,964,512 |
| Interest reserve left at month 24 | $292,860 | $35,488 |
| Origination fee | $200,000 | $200,000 |
| Draw inspections | $72,000 | $72,000 |
| Lender legal and third-party costs | $60,000 | $60,000 |
| Total cost of capital | $2,039,140 | $2,296,512 |
| Average drawn balance | $12,193,855 | $12,278,198 |
| Annualized cost on the average balance | 8.36% | 9.35% |
What the example shows
- The average drawn balance is about 61% of the commitment, so interest is far lower than the note rate times the full loan amount
- Fees are charged on the full commitment, so they add 1.36% a year to the annualized cost at the 7.00% rate
- A 1.00% higher index uses $257,372 more of the reserve and leaves almost nothing for a delay
- Fees and reserve usage matter more on smaller or faster projects, where the average balance is lower
What happens to the cost if construction runs late?
Delay is the most common reason a construction budget breaks. In the same hypothetical project, stretch the $18,000,000 of cost draws over 21 months instead of 18 and extend the loan to 27 months. At a 7.00% rate, interest rises to $1,883,107 and leaves $116,893 in the reserve. At 8.00%, interest reaches $2,168,828 and the reserve comes up $168,828 short before any extension fee.
The sponsor or the guarantor funds that gap in cash. This is why lenders stress test the reserve against a later completion and a higher index, and why a rate cap or an extra reserve cushion can be worth its cost. The construction underwriting guide covers how lenders review the draw schedule and carry assumptions.
How to compare construction loan quotes
Put every term sheet into the same draw schedule. Model interest at the quoted spread over the current index and again at a higher index, add every fee, and divide the total by the average drawn balance. Then compare the parts a rate cannot show: loan-to-cost, guarantees, extension tests, and whether the takeout lender will accept the finished project.
Capital Partners places construction financing from $1M to $100M through banks, debt funds, and specialty lenders. Review the construction loans program, then submit a deal with your budget, schedule, and equity so the request reaches lenders that finance your project type.
Sources
Rate notes from Capital Partners
Leave your email and a principal will send commentary when benchmark rates move enough to change what lenders are quoting.
Common questions
What is the interest rate on a commercial construction loan?
Each loan is priced as a spread over prime or SOFR, with a floor, based on the project, the sponsor, and the leverage. The benchmark table on this page shows the current index values. A lender sets the spread after reviewing the budget, plans, equity, and takeout.
Do you pay interest on the full construction loan amount?
No. Interest accrues only on the amount drawn, which starts small and grows as work is completed. Origination fees, however, are usually charged on the full commitment on day 1.
Are construction loan rates fixed or variable?
Most are variable. Some banks offer a swap to fix the rate, and some agency programs combine construction and permanent financing at a fixed rate. Floating loans may require a rate cap.
How is an interest reserve calculated?
The lender models monthly draws from the construction schedule, applies an assumed rate to the growing balance, and adds carry through lease-up. Most lenders also test the reserve at a higher rate and a later completion date.
Are construction loan rates higher than permanent loan rates?
Construction loans usually carry wider spreads because the lender takes completion and lease-up risk and manages draws every month. Once the property is stabilized, a takeout loan can refinance it on permanent terms.
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