Example 11 - Construction Loan

This example applies to our online demo Time Value of Money Calculator. The C-Value! program for Windows works in a similar way and has a few more features. Note, our online demo TVM calculator is limited to calculations using interest rates between 2.0% and 8.9%

A loan or mortgage with multiple borrows (multiple advances or loan events) and unknown payment amounts. This example demonstrates how a credit line might be drawn down

For greater detail about how values are entered into the TVM calculator, please see Example 1 - conventional mortgage or loan.

Background: A construction loan is a typical example of a single debt obligation which has multiple loan advances. When one wants to build a house, they will often line up a credit line for the estimated cost of construction. The lender however, will not give the borrower access to all the funds at one time. Rather the monies will be advanced when different construction mile stones are reached. This example shows how to set up a payback schedule for this type of loan.

The Johnson's have received a credit line from a bank for $350,000 for the purpose of constructing a house. The initial advance will be for $75,000 and the remaining funds will be made available at different points in the construction process. Monthly payments will be made based on a 15 year payment schedule. The payment amount is unknown and will be calculated by the time value of money calculator.

To create a loan schedule comprised of multiple loans with one payback schedule, follow these steps:

1. Click the [New] button to clear any previous entries.
2. Set "Rounding" to "Open Balance" by clicking on the "Rounding" button.

3. Set "Compounding" to "Monthly"
4. Enter 7.25% for the "Nominal Annual Rate".
5. Create a "Loan" event in row one of the cash flow input area.

1. Set the "Date" to September 13, 2012 (mm/dd/yyyy)
2. Set the "Amount" to $75,000.00
3. Set the "# Periods" to 1.

6. Move to the second row of the cash flow input area. Select "Payment" for the "Event" type. The regular payment amount is unknown. It will be based on the assumption that the loan will be paid-off in 15-years, i.e. 180 monthly payments.

1. Set the "Date" to October 1, 2012
2. Set the "Amount" to "Unknown"
3. Set the "# Periods" to 180.
4. Calculate the unknown. The result is $683.00

Before the calculation, your screen will look like this.

There is another loan event in October.

7. Reset the "# Periods" for the first payment event 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. Set the "Date" to October 12, 2012
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 "Event" type. The regular payment amount is unknown.

1. Set the "Date" to November 1, 2004 (11/01/2004)
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.

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

There are two more loan events. Both in November.

11. Reset the "# Periods" for the second payment event (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, 2004 (11/08/2004)
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, 2004 (11/29/2004)
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 "Event" type. The regular payment amount is unknown.

1. Set the "Date" to December 1, 2012
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.

15. Calculate the unknown. The result is now $3,029.55
16. 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.

17. Additionally, to visualize the cash flow, click on the "Charts" tab.

Items: A couple of notes about construction loans: Construction loans are not mortgages. As they're name implies, 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.

Back to the online Time Value of Money Calculator.