How Interest Reserves Work
When a lender sets up an interest reserve, the full loan amount is funded at closing, but a portion of those funds is held in a reserve account rather than disbursed to the borrower. Each month, the lender draws from the reserve to cover the monthly interest payment. This continues until the reserve is depleted or the loan is paid off.
For example, if six months of interest on a $500,000 loan came to about $26,000, the lender would hold that $26,000 at closing and the borrower would receive about $474,000 in usable proceeds. This is an illustration only; North Coast Financial does not offer interest reserves.
North Coast Financial bridge loans require monthly payments made directly by the borrower. We do not offer interest reserves or interest-only payments on any of our bridge loans; payments are based on a 30-year amortization with the balance due at the end of the term. Monthly payments are the borrower's responsibility and are due each month throughout the loan term.
When Interest Reserves Are Used
Interest reserves are more common in construction loans, fix-and-flip financing, and some commercial bridge loan products. They are used when the borrower may not have predictable cash flow during the loan term to make monthly payments. For residential bridge loans where the borrower has ongoing income, direct monthly payments are typically the expected structure.
The Trade-Off
An interest reserve reduces the net proceeds the borrower receives at closing. If a borrower needs a specific amount to fund a property purchase, the loan must be sized to cover both the purchase proceeds and the interest reserve. This can push the loan closer to the maximum LTV, leaving less equity cushion.
