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Interest Reserve Calculator
Construction and rehab lenders set aside an interest reserve at closing to cover monthly interest during the build. This calculator sizes that reserve based on loan amount, rate, build term, and the average outstanding balance as draws flow in.
linear draw ≈ 50%
Interest reserve needed
$18,408
held back from proceeds
Average monthly interest
$2,045
Average outstanding balance
$233,750
If fully drawn day 1
$33,469
upper bound
Reserve savings vs full draw
$15,061
How the math works
Construction loans charge interest only on drawn funds. Since draws happen gradually over the build, the average outstanding balance is well below the full loan amount — typically 45–60% for a standard linear draw schedule.
Lenders usually set the reserve aside from proceeds at closing so borrowers don't have to write monthly interest checks during the build. A reserve that runs out before substantial completion becomes a cash call on the borrower.
How to Use
- Enter the total construction/rehab loan amount.
- Enter the note rate. Construction loans price higher than take-out mortgages, often prime + 1% to 4%.
- Enter the build term in months. Most residential builds run 6–12 months.
- Enter the expected average drawn balance. Linear-draw projects average around 50%; heavy-front projects can be 60–70%.
Frequently Asked Questions
Why do lenders require an interest reserve?
The borrower isn't generating income from the property during construction, so they'd have to write monthly interest checks out of pocket. A reserve protects against default and smooths cash flow during the build.
How is the reserve size calculated?
Lenders estimate the average outstanding balance over the build (usually 50–60% of the loan amount) and multiply by rate and term. A 9-month build at 10.5% on $425k with a 55% average outstanding ≈ $18,400 reserve.
What if the reserve runs out?
If draws accelerate or the build drags past term, the reserve can run dry. The lender will either require a capital call (borrower writes checks) or modify the loan. Budget a 15–20% cushion on reserve size.
Does the reserve count toward loan-to-cost?
Usually yes — it's funded by the loan itself, so it consumes LTC capacity. A $425k loan with $18k reserve delivers $407k of actual construction capital.
Related Calculators
Construction Loan Calculator
Month-by-month interest with a draw schedule.
Draw Schedule Calculator
Stage-based allocation of the construction budget.
Loan-to-Cost Calculator
Check LTC limits with reserve inclusion.
Hard Money Loan Calculator
Short-term rehab loans with similar mechanics.
Rehab Loan Calculator
203k and rehab financing structures.
Cost Overrun Calculator
Budget contingency on top of the reserve.
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