Home
Back
Interest Reserve Calculation:
| From: | To: |
An interest reserve is a feature in construction loans where the lender sets aside funds to cover the interest payments during the construction period. This allows borrowers to make interest payments without needing to provide additional funds during construction.
The calculator uses the formula:
Where:
Explanation: The calculation accounts for the total interest that will accrue during the construction period based on the loan amount, interest rate, and loan term.
Details: Accurate interest reserve calculation is crucial for construction loan planning as it helps borrowers and lenders understand the total cost of borrowing during the construction phase and ensures sufficient funds are allocated for interest payments.
Tips: Enter the total loan amount in dollars, the annual interest rate as a percentage, and the loan term in months. All values must be positive numbers.
Q1: Why is an interest reserve needed for construction loans?
A: Construction loans typically don't require principal payments during construction, but interest accrues. An interest reserve ensures these payments are covered without burdening the borrower during construction.
Q2: How is the monthly interest calculated?
A: Monthly interest is calculated as (Loan Amount × Annual Interest Rate) ÷ 12. This assumes simple interest calculation.
Q3: Does the interest reserve affect the total loan amount?
A: Yes, the interest reserve is typically included in the total loan amount, which means borrowers are effectively borrowing more to cover the interest payments during construction.
Q4: What happens if the interest reserve is insufficient?
A: If the interest reserve is insufficient, the borrower may need to provide additional funds to cover interest payments, or the lender may need to adjust the loan terms.
Q5: Are there different methods for calculating interest reserve?
A: While the basic calculation is standard, some lenders may use more complex methods that account for draw schedules or variable interest rates during construction.