Between loan origination and principal payoff(s), servicing interest is normally the only payments applied to the loan balance. Interest may be serviced in one of two ways: Manual servicing (or direct payments) or using Interest Reserve.
Manual Servicing: If the Borrower is manually servicing interest payments, they will receive a bill for the amount due once it is calculated on the 1st of each month. They have until the 15th of the month to make a payment. On the 16th any outstanding charges will incur a late fee.
Interest Reserve: If the Borrower is using Interest Reserve, they will not make interest payments during the life of the loan if the Interest Reserve has not been depleted. In these cases, the Interest Reserve is calculated at the time of origination, based on the projected draw schedule for the loan, to determine the total interest that should incur over the life of the loan. For Borrower's with multiple loans through Builders Capital, Interest Reserve is calculated and monitored separately for each loan.
Each month, when interest is calculated, it is added to the principal balance of the loan. Simultaneously the interest is subtracted from the outstanding Interest Reserve balance. Interest Reserve may be depleted faster than projected due to one of the following conditions:
- If the Borrower draws funds faster than originally projected.
- If the Borrower incurs extra fees beyond original expectations. Or
- If the Borrower has an unforeseen delay in completing their project.
In these cases, the Borrower must either begin servicing their interest manually via cash payments or apply for a Loan Modification to increase the Interest Reserve.