Interest Reserves: Loan Funds Set Aside to Cover Your Payments

An interest reserve is a slice of loan proceeds held back at closing to pay your monthly interest while the property isn't producing income. The lender pulls each payment from the reserve, so you are not writing checks during the build or rehab.

It is common on ground-up construction, heavy rehab and some bridge loans.

A simple example

Example, round numbers. You expect a 9-month build. Projected interest averages $3,000 a month as draws fund, so the lender sets aside $27,000. If the house is done and sold in 7 months, the remaining reserve is typically not spent. If the build runs 11 months, the reserve runs dry after month 9 and the last two payments come from you.

Things to keep straight

• It is borrowed money. You repay it with the rest of the loan.
• It can accrue interest itself, depending on how the loan is set up.
• On draw-based loans, some lenders charge interest only on funds actually disbursed, while others charge on the full loan amount from day one. Ask which applies.
• An interest reserve is not the same as an interest-only loan. One describes who makes the payment. The other describes what the payment covers.

Why it matters to you

A reserve protects your cash during the project, but it only lasts as long as your schedule holds. Size it to a realistic timeline and include it in your total project cost.

RSC Private Lending can build full interest reserves into Fix & Flip and New Construction loans, and neither program requires cash reserves. Send us your scenario for a term sheet in 24 hours. Subject to underwriting.