Real estate investors who are taking advantage of new construction or those who are just thinking about it, understanding how much you’ll need in the transaction is important when gathering your financials and talking to a construction lender. And just like financing an existing home, you’ll need tohow construction loans work have a down payment and closing costs.

The down payment amounts can vary from bank to bank but a common down payment requirement is 20 to 25 percent, the same as financing an existing property.

Closing costs really don’t change with regard to the occupancy of the property. That means if you’re going to build a new home to sell or rent, you won’t be penalized with the construction loan simply because you don’t intend to live there. At least as far as the construction loan is concerned. Yet as the home is being built, interest will accrue and different construction lenders have different requirements but they both fall into the category of “pay as you go” or “interest accrual.”

Say you take out a construction loan for a property estimated to cost $200,000 to build from the ground up. As different phases of the project are completed, the bank then forwards funds to the builder in increments—the builder never gets the lump sum up front.

Each time funds are distributed, interest accrues on the distributed funds, not the entire loan amount. For example, if the bank forwards $20,000 to the builder after the site has been cleared and is ready to pour the mud and the rate on the loan is 8.00 percent, the simple interest due is 8.00 percent on $20,000. That works to $1,600 or $133 per month. If the bank allows interest to accrue, it will be added to your final payoff amount. If the bank requires interest payments to be made, you will make the required interest payment based upon the rate and disbursed funds.