1. What is Construction Interest Reserve?

Construction Interest Reserve is an amount set aside to cover interest payments during the construction period of a project. It's commonly used in construction loans where the project isn't generating income yet but interest payments are accruing.

2. How Does the Calculator Work?

The calculator uses the Construction Interest Reserve formula:

Where:

• \( Loan \) — Total loan amount in dollars
• \( Rate \) — Annual interest rate in decimal form
• \( Time \) — Construction period in months

Explanation: The formula accounts for the average loan balance during construction (hence dividing by 2) and converts the monthly period to years.

3. Importance of Interest Reserve Calculation

Details: Accurate interest reserve calculation is crucial for construction financing to ensure sufficient funds are available to cover interest payments during the construction phase before the project becomes revenue-generating.

4. Using the Calculator

Tips: Enter the total loan amount in dollars, annual interest rate as a decimal (e.g., 0.08 for 8%), and the construction period in months. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: Why divide the loan by 2 in the formula?
A: This accounts for the average loan balance during construction, as funds are typically drawn down gradually rather than all at once.

Q2: How is the interest rate entered?
A: Enter the annual interest rate as a decimal (e.g., 0.075 for 7.5%).

Q3: What's a typical construction period?
A: Construction periods vary but typically range from 6-24 months depending on project size and complexity.

Q4: Does this account for partial interest payments?
A: No, this calculates the total estimated interest reserve needed for the entire construction period.

Q5: Should this be adjusted for contingency?
A: Many lenders add a contingency factor (10-20%) to account for potential construction delays.