💰 Interest Reserve Accounts Explained: How They Help Manage Construction Loan Payments 🏗️

🏦 What Is an Interest Reserve Account? Everything Borrowers Should Know 💡

October 16, 2025•2 min read

🏦 What Is an Interest Reserve Account? Everything Borrowers Should Know 💡

💰 Interest Reserve Accounts Explained: How They Help Manage Construction Loan Payments 🏗️

What Is an Interest Reserve Account?

An interest reserve account is a financial tool used primarily in construction and bridge loans to cover interest payments during the loan period. Instead of making monthly payments out of pocket, the borrower’s interest payments are pre-funded and drawn automatically from this reserve account.

For example, when financing a ground-up construction project, lenders often include an interest reserve within the total loan amount. This ensures the borrower doesn’t have to make monthly payments while the property is under development — a time when it’s not yet generating income.

How It Works

Here’s how it typically functions:

1.The lender estimates total interest expenses for the construction period.

2.These funds are placed in a separate reserve account at closing.

3.Each month, as interest accrues, the lender withdraws from this reserve to pay itself.

This system helps maintain consistent loan performance and avoids the risk of late or missed payments during the construction phase.

Benefits for Borrowers

✅ Cash Flow Relief: No monthly out-of-pocket interest payments during construction.
✅ Easier Underwriting: Predictable debt service coverage from day one.
✅ Project Stability: Reduces borrower stress while focusing on completion and leasing.

Who Uses It

Interest reserve accounts are common for:

·Developers and investors financing construction or renovation projects

·Bridge loan borrowers between acquisitions and permanent financing

·Value-add investors improving underperforming assets

In short, an interest reserve is a strategic financing tool that helps borrowers manage cash flow, meet lender expectations, and keep projects on track.

If you’re planning a construction or rehab project, working with a mortgage broker like Medallion Funds can help structure your deal with the right reserve — ensuring smoother execution and stronger lender confidence.

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Bill Rapp - Commercial & Residential Mortgage Broker

Whether you're a first-time homebuyer, a seasoned investor, or a business owner with ambitious plans, securing the right financing is crucial. At Medallion Funds, we take the guesswork out of mortgages, offering a comprehensive suite of residential and commercial loan options to fit your unique needs. Looking for Your Dream Home? We understand the excitement and challenges of navigating the residential real estate market. Our experienced mortgage brokers will guide you through every step, from pre-qualification to closing. We offer a variety of loan programs to suit your financial situation, including: • Fixed-rate mortgages: Offering stability with predictable monthly payments. • Adjustable-rate mortgages (ARMs): Providing competitive rates for a set period. • FHA loans: Making homeownership accessible with lower down payments. • VA loans: Rewarding veterans with attractive rates and flexible terms. Investing in Your Business Future? Growth often requires capital, and we can help you unlock the potential of your commercial property. Our brokers specialize in a wide range of commercial loan options, including: • Purchase loans: Financing the acquisition of new buildings or land. • Construction loans: Facilitating the development of your project. • Refinance loans: Restructuring your existing mortgage for better terms. • SBA loans: Providing access to government-backed financing for qualified businesses. The Medallion Funds Difference: We go beyond simply finding a loan. We take the time to understand your goals and develop a personalized strategy. Here's what sets us apart: • Expertise: Our brokers have a deep understanding of both residential and commercial lending. • Competitive Rates: We leverage our strong lender relationships to secure the best possible terms. • Streamlined Process: We handle the paperwork, keeping you informed every step of the way. • Exceptional Service: We're committed to providing you with a positive and stress-free experience. Ready to Take the First Step? Contact Medallion Funds today for a free consultation. Let's discuss your financing needs and help you achieve your dreams!

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