Accurate Construction Loan Calculator™

What is a construction loan?

How does one differ from the more common mortgage loan?

And how do you use the Accurate 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.

By making incremental advances to the builder, the lender reduces the risk and the costs for the borrower. If the entire construction cost gets paid to the builder up-front, and the builder goes bankrupt or disappears, the borrower would still be obligated to pay back the loan. More below

Recent changes and enhancements

• Sept. 2023: Export any schedule's data to Excel/xlsx file. Click on "Schedule" then "Continue" past the title page.
• User inputs are automatically sorted prior to file save and calculation. This fixes the issue where the "Unknown" would not calculate due to overlaping dates in different cash flow series unless user had clicked the "Expand" button.

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

Why?

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.

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 Accurate 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.

All users should work through the more detailed first tutorial to understand the Ultimate Financial Calculator's (UFC) basic concepts and settings.

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

1. Set "Schedule Type" to "Loan"
   • Or click the [New] button to remove any previous entries.
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".

4. 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.

5. 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 (Fig. 1):

• Construction is moving along. Enter 3 more loan advances.

6. 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
7. 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.
8. 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 (Fig. 2):

• 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.

9. Move to 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. Fig. 3

• Calculate the ending loan balance, i.e. final payment due. Fig. 4

• 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. Fig. 5

To create a construction loan amortization schedule with P&I payments, follow these steps:

1. Set "Schedule Type" to "Loan"
   • Or click the [New] button to clear any previous entries.
2. Set "Rounding" to "Adjust the 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 "Monthly".
   3. Enter 7.25 for the "Initial Interest Rate".

4. In row one of the cash flow input area, create a "Loan" series
   1. Set the "Date" to September 13
   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.

5. Move to the second row of the cash flow input area. Select "Payment" for the "Series". The regular payment amount is unknown. We need the payment size to be a manageable amount. Therefore, we'll calculate the amount assuming a 15-year term, i.e., 180 monthly payments (of course the borrower will pay it off much sooner).
   1. Set the "Date" to October 1
   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 (Fig. 6):

6. Calculate the unknown. The result is $683.00. Fig. 7.

7. 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.
8. 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
9. 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 (Fig. 8):

10. Calculate the unknown. The result is now $1006.65. Fig. 9

• There are two more loan events - both in November.

11. Reset the "# Periods" for the second payment series (row four) to 1.
12. 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
13. 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
14. 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.) Fig. 10

• Before the calculation, your screen will look like this.

15. Calculate the unknown. The result is now $3,029.55. Fig. 11

16. 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" Fig. 12
    5. Set the "# Periods" to "1"

17. 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.
18. 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.

If you have any questions about the Accurate Construction Loan Calculator, feel free to leave them in the comment section below.

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