Interest Reserve | North Coast Financial
Bridge Loan Glossary

Interest Reserve

An interest reserve is a portion of the loan proceeds set aside at closing to cover monthly interest payments during the loan term. Instead of the borrower making payments out of pocket each month, the lender holds a reserve account that automatically covers those payments as they come due.

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.

Interest Reserve
California homeowners can buy their next home before the current one sells.

For example, on a $500,000 bridge loan at 10.45% for a projected 6-month term, the monthly interest is approximately $4,354. A 6-month interest reserve would be approximately $26,000. The lender holds that $26,000 at closing, and the borrower effectively receives $474,000 in usable proceeds.

Interest Reserve
A residential bridge loan is secured by the equity in your existing California property.
Important: North Coast Financial Requires Monthly Payments

North Coast Financial bridge loans require monthly payments made directly by the borrower. We do not offer interest reserve structures on our standard bridge loan products. 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.

Interest Reserve
North Coast Financial has funded over $1 billion in private money loans since 1981.

Frequently Asked Questions

No. North Coast Financial bridge loans require monthly payments made directly by the borrower. We do not offer interest reserve structures on our standard residential bridge loan products.
An interest reserve is a portion of the loan set aside at closing to cover future monthly payments. Instead of making payments out of pocket, the reserve account covers them automatically each month. North Coast Financial requires direct monthly payments rather than an interest reserve structure.
Interest reserves reduce the net proceeds to the borrower and require the loan to be sized larger to accommodate the reserve. They also carry regulatory and accounting considerations for the lender. Many direct lenders, including North Coast Financial, structure loans with monthly borrower payments instead.