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Construction Loan with Multiple Loan Advances
Tutorial 11

A "construction loan" is a single loan with multiple borrows. The name comes from the fact that such loans are frequently used to cover the construction of a house or other building. The borrower makes additional borrows against the loan to pay construction costs as they occur. The Ultimate Financial Calculator gives the user complete control over the cash flow and is ideally suited for amortizing a construction loan. This tutorial shows you how.

This example applies to our online    Ultimate Financial Calculator. The     C-Value! program for Windows works in a similar way and has a few more features including the ability to save your work.

All users should work through the first tutorial to understand basic concepts about the calculator.

To create a construction loan amortization schedule, follow these steps:

  1. Set "Schedule Type" to "Loan"
    • Or click the [Clear] button to clear any previous entries.
    • The top two rows of the grid will not be empty
    • Delete the 2nd row by selecting it and clicking on the [Delete] button
  2. Set "Rounding" to "Adjust last amount to reach "0" balance" by clicking on the {Settings} {Rounding Options}
  3. In the header section, make the following settings:
    1. For "Calculate Method" select "Normal".
    2. Set "Initial Compounding" to "Daily".
    3. Enter 7.25 for the "Initial Interest Rate".
  1. In row one of the cash flow input area, create a "Loan" series
    1. Set the "Date" to September 13, 2016
    2. Set the "Amount" to 75,000.00
    3. Set the "# Periods" to 1
      • Note: Since the number of periods is 1, you will not be able to set a frequency. If a frequency is set, it will be cleared when you leave the row
  1. Move to the second row of the cash flow input area. Select "Payment" for the "Series". The regular payment amount is unknown. It will be based on the assumption that the loan is to be paid-off in 15-years, i.e. 180 monthly payments (though it will actually be paid off much sooner).
    1. Set the "Date" to October 1, 2016
    2. Set the "Amount" to "Unknown" by typing "U".
    3. Set the "# Periods" to 180
    4. Use the [Tab] key to tab to Frequency. Select "Monthly".
    5. The "End Date" will automatically be calculated

Your calculator should now look like this:

Construction loan first borrow
Construction loan, first borrow and first payment calculation.
  1. Calculate the unknown. The result is $683.00
Construction loan first payment
First payment calculated
  1. Reset the "# Periods" for the first payment series to 1. We do this because only one payment is made before the next loan advance is required.
  2. Create a "Loan" event in row three of the cash flow input area
    1. Reset the "Date" to October 12, 2016
    2. Set the "Amount" to $35,400.00
    3. Set the "# Periods" to 1
  3. Move to the fourth row of the cash flow input area. Select "Payment" for the "Series". The regular payment amount is unknown
    1. Set the "Date" to November 1, 2016
    2. Set the "Amount" to "Unknown"
    3. Set the "# Periods" to 179. (180 months less the one payment already made)

Before the calculation, your screen will look like this.

Construction loan second borrow
Second borrow and second payment calculation setup
  1. Calculate the unknown. The result is now $1006.65
Construction loan second payment
Second payment calculated

There are two more loan events - both in November.

  1. Reset the "# Periods" for the second payment series (row four) to 1.
  2. Create a "Loan" event in row five of the cash flow input area
    1. Set the "Date" to November 8, 2016
    2. Set the "Amount" to $110,500.00
    3. Set the "# Periods" to 1
  3. 2nd loan event in November
    1. Create a "Loan" event in row six of the cash flow input area.
    2. Set the "Date" to November 29, 2016
    3. Set the "Amount" to $110,500.00
    4. Set the "# Periods" to 1
  4. Move to the seventh row of the cash flow input area. Select "Payment" for the "Series". The regular payment amount is unknown
    1. Set the "Date" to December 1, 2016
    2. Set the "Amount" to "Unknown"
    3. Set the "# Periods" to 178. (180 months less the two payments already made.)

Before the calculation, your screen will look like this.

Construction loan two loan advances
Two more loan advances
  1. Calculate the unknown. The result is now $3,029.55
Construction loan third payment series
Third payment series calculation
  1. Construction is completed. Closing on the mortgage is January 16th, 2017. What's the balance due?
    1. Click on the seventh row. Set the "# Periods" to "2". (For payments due Dec. 1 and Jan. 1.
    2. Click on the eighth row. Set the "Series" to "Payment"
    3. Set the "Date" to "January 16th, 2017"
    4. Set the "Amount" to "Unknown"
    5. Set the "# Periods" to "1"
Construction loan unknown balance
Setting up to calculate the unknown balance
Construction loan final balance
Calculated total balance due
  1. And, as usual, if you want to see a detailed amortization schedule showing how the monthly payment is allocated between principal and interest, click on the "Schedule" tab above the input area.
  2. Additionally, to visualize the cash flow, click on the "Charts" tab.

A couple of notes: Construction loans are not mortgages. As already mentioned, they are utilized to provide funding for building. Normally, due to increase risk to the lender during construction, the interest rate is higher than the prevailing rate for mortgages. Therefore, construction loans are replaced with conventional mortgages at about the time a certificate of occupancy (CO) is issued. The flexibility of the Ultimate Financial Calculator gives you the ability to precisely track the multiple borrows and payments typical of these loans.