1. What is Interest Reserve?

Interest Reserve is the amount of money set aside to cover interest payments on a loan during a specific period, typically used in construction loans or other financing arrangements where payments may be deferred.

2. How Does the Calculator Work?

The calculator uses the Interest Reserve formula:

Where:

• Loan Amount — Principal amount of the loan in dollars
• Rate — Annual interest rate in decimal form
• Time — Duration in months

Explanation: The formula calculates the interest that will accrue over a specified period by converting the time from months to years (dividing by 12).

3. Importance of Interest Reserve Calculation

Details: Accurate interest reserve calculation is crucial for financial planning, ensuring sufficient funds are available for interest payments, and maintaining loan compliance.

4. Using the Calculator

Tips: Enter the loan amount in dollars, rate as a decimal (e.g., 0.05 for 5%), and time in months. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: Why divide by 12 in the formula?
A: The division by 12 converts the time period from months to years since interest rates are typically annual rates.

Q2: How is this different from regular interest calculation?
A: Interest reserve specifically refers to funds set aside in advance to cover future interest payments, rather than calculating interest for immediate payment.

Q3: When is interest reserve typically used?
A: Commonly used in construction loans where payments may be deferred until project completion or specific milestones are reached.

Q4: Does this account for compounding interest?
A: This is a simple interest calculation. For compounding interest, a different formula would be needed.

Q5: How often should interest reserve be recalculated?
A: Should be reviewed periodically, especially if project timelines change or if there are changes to the loan terms.