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What is a construction loan?

How does one differ from the more common mortgage loan?

And how do you use the Ultimate Construction Loan Calculator (UCLC)?

Spend a few minutes here, and I'll explain both construction loans and how to use this calculator so you can track loan payments exactly and know the balance due as of any date, step-by-step.

A mortgage is the type of loan one would take out to finance the purchase of an existing home or building. With a mortgage, the lender makes one loan advance to pay the seller on behalf of the borrower.

But what about when the future homeowner wants to build a home, and they do not have the funds to cover construction cost? A lender won't issue a mortgage on an unbuilt building.

In that case, the future owner needs to apply for a home construction loan. Unlike mortgages which have a single borrow, construction loans involve multiple borrows. The borrower, builder, and lender will agree on the construction cost and the amount financed. But rather than provide all the funds at the start of the project, the lender will advance predetermined amounts at predetermined construction milestones.

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Idx No Series Date Amount # Periods Frequency End Date Series Options cmpFreq specialSeriesType SpecialSeriesStruct


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Granted, if you are dealing with a reputable builder, such a scenario is unlikely. But by their nature, construction loans, do save borrowers money.


The borrower is responsible for paying interest charges as they borrow the money. By lending additional amounts over time, the debt balance gradually increases, which holds down interest costs. It may not amount to a lot, but why pay more interest when it's not necessary?

On the other hand, I would be remiss if I didn't mention that interest rates will be higher for construction loans when compared with mortgage rates. The reason for the higher rate is because the lender is taking on added risk, and lenders want additional compensation for the added risk.

Types of Construction Loans

Construction loans come in two flavors.

  • Stand-alone construction - borrower must also apply for a mortgage as a separate step in addition to the construction loan
  • Construction-to-permanent - guaranteed to convert to a mortgage, usually when the regulators issue the certificate-of-occupancy

The loan type does not impact how we set up the calculation. However, for the borrower, the "construction-to-permanent" loan is more advantageous since there is no risk to the borrower that they won't be able to obtain a mortgage.

On the other hand, a construction-to-permanent loan contract may have language that requires the borrower to convert the loan to a mortgage with the same lender or otherwise face a penalty. This requirement is a potential disadvantage to the borrower if, during construction, interest rates fall. The interest rate for the mortgage may be locked in at a higher rate.

Plus two amortization methods

After the lender starts to make loan advances to the builder, the lender will require the borrower to make regular, periodic payments. Regardless of whether the construction loan is a stand-alone or a construction-to-permanent type, there are two ways to calculate the payment amount due:

  • payment will include both principal and interest (P&I); or
  • payment will include interest-only

The Ultimate Construction Loan Calculator is easily capable of handling either payment calculation and creating an amortization schedule.

This calculator is also capable of handling either home construction loans or commercial construction loans equally as well.

Below are the step-by-step instructions. Since interest-only construction loans are the more common, we'll start with that payment method first.

Interest Only Construction Loan

To create a construction loan amortization schedule with interest-only payments, follow these steps:

  1. Set "Schedule Type" to "Loan"
    • Or click the [Clear] button to remove 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. Click on the {Settings} {Rounding Options}, and set "Rounding" to "Adjust the last amount to reach "0" balance"
  3. In the header section, make the following settings:
    1. For "Calculate Method" select "US Rule".
      • Setting US Rule prevents interest from being charged on accrued, but yet unpaid interest when a new loan is advanced. Change this to "Normal" to see the difference.
    2. Set "Initial Compounding" to "Exact/Simple".
    3. Enter 5.5 for the "Initial Interest Rate".
  1. In row one of the cash flow input area, create a "Loan" series
    1. Set the "Date" to May 16
    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 there is a frequency set, the calculator will clear it when you leave the row.
  1. Move to the second row of the cash flow input area. We will create the anticipated payment schedule series.
    1. Select "Payment" for the "Series".
    2. Set the "Date" to July 1
    3. Set the "Amount" to "Unknown" by typing "U".
    4. Set the "# Periods" to 5
      • Why 5? We expect construction to last 5 months with payments due on the 1st.
      • You can adjust this number as construction progresses.
    5. Use the [Tab] key to tab to Frequency. Select "Monthly".
    6. The calculator will automatically calculate the "End Date."
    7. Click on "Cash Flow Options". Select "Interest Only" and then click on "Activate 'Interest-Only' payment amount for currently selected series." Click "Save Changes."
      • If you entered "1" under "# Periods", you won't see "Cash Flow Options", so set this to 2, select the interest only option and then set the "# Periods" back to "1" if needed.
  • Your calculator should now look like this:
interest only construction loan first borrow with payment series
First borrow and anticipated interest only payment series.
  • Construction is moving along. Enter 3 more loan advances.
  1. Create a "Loan" event in row three of the cash flow input area
    1. Reset the "Date" to July 12
    2. Set the "Amount" to $35,000.00
    3. Set the "# Periods" to 1
  2. Move to row 4. Select "Loan" for the "Series".
    1. Set the "Date" to July 26
    2. Set the "Amount" to "$40,000.00"
    3. Set the "# Periods" to 1.
  3. Move row 5. Select "Loan" for the "Series".
    1. Set the "Date" to Sept. 10
    2. Set the "Amount" to "$90,000.00"
    3. Set the "# Periods" to 1.
  • Your screen will look like this.
Construction loan add three additional loan advances
Add three additional loan advances as construction progresses
  • We expect to receive the CO, and convert the construction loan to a mortgage on November 10. Calculate the construction loan's balance due including accrued interest.
  1. Move row 6. Select "Payment" for the "Series".
    1. Set the "Date" to Nov. 10
    2. Type "U" to set the "Amount" to "Unknown"
    3. Set the "# Periods" to 1.
Construction loan unknown balance setup
Setup to calculate the unknown loan balance with all accrued interest.
  • Calculate the ending loan balance, i.e. final payment due.
Construction loan unknown balance setup
Loan balance as of Nov. 20th, $240,330.00 — $240,000 principal plus $330.00 accrued interest.
  • After calculation, row 6 shows the balance due as of the date indicated. Change the date by even a day, set to "Unknown" and recalculate. Notice the final payment changes. (Naturally, if the loan dates change, the final payment changes as well.)
  • The periodic interest payments change as additional borrows occur. Please see the amortization schedule for details.
  • If the borrower does not make the scheduled payments, click the "Expand" button, and edit the payment dates as needed
  • If (when?) construction goes beyond the expected completion date, either:
    1. Change the number of projected payments, or;
    2. If you've already expanded the inputs and changed the dates, then add a new single interest-only payment.
  • Click [Schedule] to see the interest-only payment details.
Construction loan two loan advances
Construction loan amortization schedule with interest-only payments
Construction loan first borrow
Construction loan — the 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
    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
    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
    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
    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
    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 completed — mortgage closing on January 16th. 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"
    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 gets 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. Due to increased risk to the lender during construction, the interest rate is higher than the prevailing rate for mortgages. Therefore, construction loans get replaced with conventional mortgages at about the time a certificate of occupancy (CO) is issued. The flexibility of the UCLC gives you the ability to precisely track the multiple borrows and payments typical of these loans.

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4 Comments on “Construction Loan Calculator”

financial online calculator Join the conversation. Tell me what you think.
  • Anthony Hosseini says:


    On row 2 of the cash flow, series option doesnt allow me to adjsut as the first row of the cash flow it was defaulted giving me options.
    Thank you.


    • Sorry, but I don’t think I understand. Are you saying that the series option/setting (the dropdown) doesn’t give you choices in the 2nd row. If you have selected "Loan" in the first row, then you should have choices for loan, payment, extra payment, etc. in the 2nd row. If this is not what you see, please provide me with all the details of all inputs for both rows.

      Just curious, if you step through the samples in the text on the page, can you do each of those steps.

      What browser are you using? Are you on a desktop computer?

      No one has reported any issues.

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interest-only tutorial
P&I tutorial