What happens to the reserve at closing
Nothing about the loan amount changes. The lender funds the same loan, but instead of sending all of the acquisition money to escrow it keeps part of it back in a reserve account and applies it to each interest payment as it comes due. First Capital Trust Deeds, a hard money lender, describes it as "an amount set aside at loan origination to cover the monthly payments", held by the loan servicer or, if the lender services in-house, credited to the account on each due date (FCTD blog, October 11, 2022).
For the borrower, the reserve is borrowed money: it's part of the loan, so it carries points, and because it comes out of the money funded at closing it accrues interest from day one, whether the note charges on the full balance or the funded balance. What it buys is cash-flow certainty. A bridge borrower waiting on a lease-up, a sale or a refinance doesn't have to write monthly checks during the months the reserve covers. For the lender, the payments for those months are already set aside.
Sizing: months × monthly interest
Pick the number of months the reserve should cover, then multiply by the monthly interest the loan will actually charge. On an interest-only loan that charges interest on the full balance, the monthly figure is the same every month.
Take a purchase bridge loan: a $1,200,000 purchase with an as-is value of $1,350,000, no rehab, a 70% As-Is LTV limit and an 18-month term at 10%. The as-is limit binds, so the loan is $945,000.
| Loan | $945,000.00 |
|---|---|
| Monthly interest (10% ÷ 12) | $7,875.00 |
| Reserve: 6 × $7,875.00 | $47,250.00 |
| Scheduled interest, full 18-month term | $141,750.00 |
The $47,250 reserve entered in the example is exactly six months of interest. It covers 6 of the 18 months; the borrower pays the rest from other funds. FCTD describes the same arithmetic on a larger loan: a $1 million, 12-month bridge at 11% has a $9,166.67 monthly payment, and a reserve covering all 12 payments is $110,000. The number of months is a negotiated term, not a fixed rule; FCTD notes borrowers can choose one, three, six, nine or another number of payments.
A rounding detail: multiplying the rounded monthly payment by the months can differ by a few cents from computing loan × rate × months ÷ 12 in one step ($9,166.67 × 12 is $110,000.04). The sizer below uses the rounded monthly figure, because that's the amount the reserve pays out each month.
Reserve sizer
Enter the loan, the note rate and the months to cover. If interest is charged only on funded money, add the amount funded at closing to see the lower bound.
- Monthly interest on the full loanLoan × rate ÷ 12, rounded to cents
- $7,875.00
- Suggested reserve, 6 monthsMonthly interest × months
- $47,250.00
What the reserve does to borrower cash at closing
The reserve comes out of the money the lender sends to closing. Every dollar withheld is a dollar of the purchase price the borrower has to bring instead. Here is the bridge example run twice through the engine, once with the reserve and once without it:
| Line | With reserve | No reserve |
|---|---|---|
| Purchase price | $1,200,000.00 | $1,200,000.00 |
| Acquisition advance | $945,000.00 | $945,000.00 |
| Less points (1%) | $9,450.00 | $9,450.00 |
| Less lender fee | $1,500.00 | $1,500.00 |
| Less interest reserve | $47,250.00 | $0.00 |
| Net loan proceeds at closing | $886,800.00 | $934,050.00 |
| Estimated cash at closing | $313,200.00 | $265,950.00 |
| Gross lender revenue | $152,700.00 | $152,700.00 |
The reserve raises the borrower's cash at closing by $47,250.00, dollar for dollar. Two things don't move. Points stay at $9,450.00 because they're charged on the whole loan, reserve included. Gross lender revenue stays at $152,700.00, because the reserve only prepays interest that's already counted in the $141,750.00 of scheduled interest.
Cash at closing here excludes title, escrow, recording, transfer taxes, insurance and other third-party charges. See cash to close on a fix and flip loan for the full checklist.
Reserves on full-balance vs funded-balance loans
On a loan with a rehab holdback, the answer depends on how interest is charged. Under full-balance terms, monthly interest is fixed from closing, so months × monthly interest is exact. Under funded-balance terms, interest starts on the acquisition advance and steps up with every draw. A reserve sized on the full loan collects for money that hasn't gone out yet.
A rehab loan shows the gap. Take a $280,000 loan at 12%: $180,000 funds at closing on Nov 2, 2026 and the $100,000 holdback goes out in three draws.
| Period | Days | Balance | Interest |
|---|---|---|---|
| Nov 2, 2026 – Jan 4, 2027 | 63 | $180,000 | $3,728.22 |
| Jan 4, 2027 – Mar 1, 2027 | 56 | $215,000 | $3,958.36 |
| Mar 1, 2027 – May 3, 2027 | 63 | $255,000 | $5,281.64 |
| Total, 182 days | 182 | — | $12,968.22 |
Three ways to size a six-month reserve on this loan give three different numbers:
- On the full loan: 6 × $2,800.00 = $16,800.00. Right for full-balance interest; too much for funded-balance interest.
- On the amount funded at closing: 6 × $1,800.00 = $10,800.00. Too little once the first draw funds.
- Along the draw schedule: the interest that actually accrues through the third draw on May 3, 2027 (182 days, one day past six calendar months) is $12,968.22.
On this schedule, a reserve sized on the full loan holds $3,831.78 more than the interest that accrues over roughly the same six months. The schedule-based figure is only as good as the draw timing: if the rehab runs ahead of plan, interest rises sooner and the reserve runs out earlier. FCTD gives a construction example of the same effect: a $4.5 million loan funded in stages carried a $337,497 reserve for 15 months of stepped-up payments, against $562,500 ($37,500 × 15) with interest on the full amount from day one (FCTD, 2022). To model your own schedule, the Dutch interest calculator takes dated draws.
Unused reserve at payoff
If the borrower sells or refinances before the reserve is used up, what happens to the balance is set by the loan documents. FCTD says that on its loans the unapplied months are refunded at payoff and "the lender isn't entitled to those funds"; it also notes that once a reserve runs out, the borrower makes regular payments for the rest of the term. Other notes can read differently, and a minimum interest clause can change how much interest is owed on an early payoff. Read the reserve and payoff provisions together, and have counsel review any form you lend on.
How the app and calculators treat the reserve
- A dollar amount, entered by hand. The app doesn't size the reserve for you. Use the sizer above (or your own schedule) and type the result into the Interest Reserve field.
- Withheld at closing. Net initial proceeds = acquisition advance − points − lender fee − interest reserve. Cash at closing = purchase price − net initial proceeds, never below zero.
- Not lender revenue. Gross lender revenue is points + lender fee + estimated interest. The reserve is a way of paying part of that interest, so counting it again would double it.
- No month-by-month reserve ledger. The app doesn't track the reserve balance over time or model refunds at payoff.
To try your own numbers, use the investor bridge loan calculator for a purchase with no rehab, or the hard money interest calculator to check the monthly figure first.
Questions
How do you calculate an interest reserve on a hard money loan?
Multiply the monthly interest by the number of months the reserve should cover. On an interest-only loan with interest on the full balance, monthly interest is the loan × the annual rate ÷ 12. A $945,000 loan at 10% has $7,875.00 of monthly interest, so a six-month reserve is $47,250.00.
Does the borrower pay interest on the interest reserve?
In effect, yes, because the reserve is part of the loan amount. It is withheld from the money funded at closing, so interest runs on it from closing whether the loan charges interest on the full balance or the funded balance, and points are charged on it too. Check how the loan documents treat reserve funds.
Is an interest reserve extra income for the lender?
No. The reserve pays interest the borrower already owes. In the calculators and the app, gross lender revenue is points plus the lender fee plus estimated interest, and the reserve is not added on top.
What happens to an unused interest reserve when the loan pays off?
It depends on the loan documents. One lender, First Capital Trust Deeds, says it refunds the unapplied months at payoff. A minimum interest clause can also affect what is owed on an early payoff. Have counsel review the terms.
How many months should an interest reserve cover?
It's a negotiated term. First Capital Trust Deeds describes reserves ranging from one month up to the maturity date. The more months reserved, the more cash the borrower brings to closing, dollar for dollar.
How do you size a reserve when interest is only charged on funded draws?
Add up the interest expected along the draw schedule for the months you want covered. The amount funded at closing gives a floor and the full loan gives a ceiling. In the example on this page the full-loan reserve is $16,800.00, the floor is $10,800.00, and interest along the schedule is $12,968.22.