The Quick Read: An interest-only hard money loan asks you to pay only the monthly interest, then repay the entire balance in one balloon payment when the term ends. Lenders underwrite the property, the project plan, and your exit as closely as they underwrite you. Across the wholesale network Lendmire works with, terms typically run 6 to 18 months with no prepayment penalty, but every figure here varies by lender, property, and experience, and nothing is a commitment to lend.
- You pay interest each month, and the principal stays untouched until maturity.
- The balloon equals the full funded balance, so rehab draws raise it.
- The lender wants a credible exit: a sale, a refinance, or payoff from other funds.
- For rentals, the usual exit is a long-term DSCR loan, which qualifies primarily on property-level rental income covering the payment, subject to lender guidelines.
- Test the exit before you sign the hard money loan, not at the end of the term.
Key Terms Defined
Interest-only payment: the monthly payment that covers accrued interest and nothing else, so the loan balance never shrinks.
Balloon payment: one large payment at the end of the term that repays the whole remaining balance.
Maturity date: the day the balloon comes due. Everything in your plan has to work before this date.
Exit strategy: how you plan to pay the balloon, such as selling the property or refinancing into long-term financing.
DSCR (debt service coverage ratio): a ratio that compares a property’s rent to its monthly housing payment. DSCR loans are long-term investor loans that qualify primarily on that rental coverage.
After-repair value (ARV): what the property is expected to be worth once the work is done.
Loan-to-cost: the loan as a percentage of your total project cost, instead of a percentage of the property’s value.
Seasoning: a waiting period a lender wants between buying a property and refinancing it.
DSCR Cash-Out Calculator
Run the cash-out numbers in your market
Rate source: Freddie Mac 30-yr average via FRED® — Federal Reserve Bank of St. Louis · effective Oct 15, 2026
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As of Oct 15, 2026 · General Freddie Mac market benchmark, not a Lendmire loan offer. Property value, balance, taxes, and insurance are editable estimates. Maximum loan-to-value varies by lender, program, property type, and seasoning. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
How the Interest-Only Balloon Structure Works
The structure is simple. Each month you pay interest on the balance outstanding. At maturity you owe that balance in full. The payment never includes principal, so you build no equity through payments.
The monthly math has three steps. The lender takes your outstanding balance, applies the yearly interest charge, and divides by twelve. A flat balance gives a flat payment. If part of the loan is a rehab holdback released in draws, the payment grows as each draw goes out. Whether interest runs on drawn funds only or on the full loan from day one depends on the lender, so the term sheet decides.
The balloon equals whatever has been funded by the end. Nothing was paid down along the way.
Lenders choose this structure because the borrower is usually in transition. The property is being bought, repaired, leased, or sold. Low monthly carry keeps your cash free for the work. The trade-off is that the whole balance depends on one event at the end.
Lower payments are not lower cost. Interest keeps accruing on the full balance for every month the project runs. Your total carry is the monthly payment times the number of months, plus lender fees and any extension fees. Tax treatment varies; consult a qualified professional.
What Borrower Requirements Look Like
Hard money underwriting is asset-led. SavingsGrove‘s financial dictionary describes it as focused on the collateral, often measured against after-repair value, and not mainly on income or credit. That is directionally right, and it is how this works across the network. Still, the lender wants a believable borrower, a believable plan, and a believable exit.
| Requirement | What the lender wants to see | Why it matters |
|---|---|---|
| Equity or cash in | Your share of cost or value | Keeps you invested in the outcome |
| Credit | 620 minimum, extra conditions below 660 | Signals payoff behavior |
| Experience | Documented completed projects | Sets your leverage tier |
| Documents | Entity papers, budget, scope, exit plan | Shows the plan is real |
| Liquidity | Cash for interest, fees, overruns | Funds the carry months |
Here is how leverage works on the current program, always varying by lender, property, and experience. Fix-and-flip loans run up to 93% of project cost with 5 or more completed projects, up to 90% of project cost with 2 or more, and up to 85% with fewer than 2. Every tier is capped at 75% of after-repair value. Bridge purchases without rehab run up to 80% of the purchase price. Refinances run up to 65% of value. Rehab funds can reach up to 100% of the rehab budget, released in draws against completed work. That is a rehab-budget figure, not a purchase ceiling.
There is no true 100% purchase program. The top tier is reserved for experienced investors, and first-time investors qualify at the lower tiers.
Loan sizes go up to $5,000,000, with larger loans by exception. Collateral is non-owner-occupied residential property of 1 to 4 units, and ground-up construction can go to 10 units. Hard money availability also varies by location. This is business-purpose lending only, so none of it applies to a home you live in.
Property and Project Requirements
The property is the loan’s collateral, so it gets the hardest look. Expect the lender to review the current value, the renovation scope, the budget, and the ARV. Draw schedules matter because the lender releases rehab money as work is completed, not in advance.
Property type matters too. Land, commercial, industrial, hospitality, and owner-occupied properties are not on the program. Manufactured homes, log homes, and barndominiums are also not offered, and that carries into your exit, because those property types are not offered through the network’s DSCR programs either. If your plan is to hold the property as a rental, check that it is eligible for the long-term loan before you buy it with hard money.
A rental exit adds one more layer of review. The property generally needs to be leased, the rent has to cover the debt, and the appraisal has to support the value. The appraisal for a rental often includes a rent schedule (Form 1007) or an operating income statement (Form 1025). Those forms show the lender what the property earns.
What a Credible Exit Looks Like
Lenders ask for your exit because it determines how and when they get repaid. A good exit answer names the route, the documents behind it, and the date by which each step happens. A vague answer names only a hope.
| Weak exit answer | Credible exit answer |
|---|---|
| I will refinance later | Named long-term loan type and its guidelines |
| The market will be fine | Sale price tied to current comps |
| I will sort out rent after | Lease in place or market rent documented |
| I will extend if needed | Backup exit that does not rely on extension |
Four exits cover almost every file.
| Exit | Best for | Main risk |
|---|---|---|
| Sell the property | Flips and projects with strong comps | Price falls short of balance plus costs |
| Refinance into a DSCR loan | Rentals held long term | Appraisal, rent coverage, or seasoning miss |
| Refinance into a conventional loan | Borrowers with full income documents | Heavier paperwork, harder without traditional employment income |
| Pay from other funds | Investors with another liquidity event | The other event slips |
Extending the loan is not on this list because an extension is a safety valve, not an exit. A performing loan may be extendable, usually for a fee, but it is at the lender’s discretion. Rolling into another short-term loan adds cost and only moves the balloon.
The DSCR Takeout Test for Rentals
Many investors refinance out of hard money into long-term DSCR financing once the property is stabilized, and Lendmire brokers that path through its hard money exit refinance program. The two loans use different tests, so line them up before you commit to the first one.
Hard money asks about the project: cost, ARV, plan, and exit. A DSCR loan asks about the rented property: coverage, leverage, credit, and reserves. A DSCR rate-and-term refinance on an investment property has an LTV ceiling of 85%, with no cash back at closing. A DSCR cash-out refinance on a standard rental tops out at 75% LTV, and that DSCR loan expects about 6 months of ownership measured from title recording. These DSCR figures can sit above the hard money refinance cap of 65% of value, which is a different product with a different test. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.
Coverage matters most. The ratio is monthly rent divided by the full monthly obligation: principal, interest, taxes, insurance, and any HOA dues. A DSCR loan typically starts around 1.00 on select programs, and stronger ratios open better terms and leverage. A separate select-lender path takes coverage below 1.00, with leverage and terms adjusted. Clearing 1.00 does not mean positive cash flow, because repairs, vacancy, management, and utilities sit outside the calculation.
The DSCR loan’s credit floor is 620, though most programs want around 660, and 700 or higher unlocks the strongest leverage tiers. DSCR loan reserves are typically about 6 months of PITIA, stepping up to about 9 months above $1,500,000. DSCR loans run up to $3,000,000 on standard programs. All of this is subject to lender guidelines, and your file is reviewed individually. For the full picture, see the complete DSCR loans guide.
Notice the timing trap. A hard money term of 6 months may end before a DSCR cash-out loan’s seasoning is met. Choose a term long enough to renovate, lease, season, and refinance, with room left over.
Where the General Rule Breaks
Interest-only is not universal. Some hard money lenders allow it and some do not. Across the network, interest-only is standard on the current program, but confirm it on the term sheet.
Interest accrual differs. Interest on drawn funds only costs less than interest on the full loan from day one. Ask which one applies before you compare offers.
Refinancing is never guaranteed. The CFPB’s page on balloon payments says you may be able to refinance before the balloon is due, but this may not work if the property’s value falls or your finances decline. Its key terms page adds that a borrower who cannot pay the balloon may have to refinance, sell, or face foreclosure.
An interest-only balloon carries the most payment shock. A balloon that is partly paid down along the way leaves a smaller final amount. An interest-only balloon leaves the whole balance. That is why the exit has to be solid.
Missing the balloon entirely is expensive. Penalties may apply under the loan terms. If you see trouble coming, contact the lender early about an extension while you start the refinance in parallel.
Balloons are generally excluded from Qualified Mortgages, which is why many big retail lenders avoid them. Business-purpose investor loans are reviewed differently from a standard owner-occupied mortgage, and that is the space hard money lives in.
A Worked Example: Closing to Payoff
Consider an investor with 2 or more completed projects buying a distressed duplex to rent. The numbers below are modeled assumptions, not market data.
- The loan funds up to 90% of project cost, capped at 75% of ARV, with rehab funds released in draws.
- The term is 12 months, interest-only, with no prepayment penalty.
- Each month, the payment rises slightly as draws go out, because interest runs on the larger balance.
- Rehab finishes, a tenant signs a lease, and the loan has been open long enough to meet the 6-month ownership mark.
- The investor applies for a DSCR cash-out refinance at up to 75% LTV on a standard rental, with rent covering the payment at roughly 1.2x.
- The new DSCR loan pays off the balloon, and the hard money loan closes out. Terms depend on the lender’s guidelines, the property type, the leverage, and a full review of the credit profile.
The stress test is where this works or fails. Say the appraisal comes in below the ARV the investor assumed. The 75% LTV ceiling now covers less than the balloon, and the gap has to come from the investor’s own funds. A rent that lands lower than modeled drops coverage toward 1.00, which narrows the options. Either miss is a named risk of the DSCR exit. The exact numbers vary by lender and program and follow a full review of property, leverage, and credit.
A backup plan prevents a missed balloon. That can mean cash set aside for a shortfall, a sale-ready property, or an extension discussed before it is needed. Start the takeout work early enough that a delay does not land on the due date, and assemble the documents while the loan is still open.
Pre-Closing Exit Readiness Checklist
Before you sign, confirm each of these.
1. The term is long enough to finish the work, lease the property, and meet seasoning on the long-term loan.
2. The property type is eligible for the loan you plan to use as your exit.
3. You know whether interest accrues on drawn funds or on the full loan.
4. Your estimated ARV and rent come from comps, not hope.
5. You have a backup exit that does not rely on an extension.
6. You have cash for interest, overruns, and any shortfall at payoff.
Frequently Asked Questions
Are all hard money loans interest-only?
No. Many are, and interest-only is standard on the current program Lendmire places files with, but terms vary by lender. Some lenders amortize part of the balance. Confirm the payment structure on the term sheet before you commit.
Do I need good credit for an interest-only hard money loan?
Credit matters less than on a long-term loan, but it still counts. The current program asks for a 620 minimum, with additional conditions below 660. Underwriting stays asset-based, so the property, the plan, and the exit carry the file, and requirements vary by lender, property, and experience.
What happens if I cannot pay the balloon?
You have three realistic moves: refinance, sell, or ask for an extension. Extensions are discretionary and usually cost a fee. If none works, default penalties and foreclosure become possible. Contact the lender early and start the refinance in parallel.
Can I pay principal early?
Yes. The current program carries no prepayment penalty, so you can repay any part of the balance whenever your plan allows. Paying early also trims the interest you owe on later months.
Can I extend the loan?
Sometimes. An extension is the lender’s choice, it usually comes with a fee, and it should be a safety valve, not a plan. Ask about extension terms before you sign, since they are easier to negotiate up front.
If you are buying, rehabbing or refinancing an investment property on a short timeline and want to see how the numbers work, Lendmire can help you compare hard money options based on the project, the exit plan, leverage, and your goals. As a broker, Lendmire arranges financing through select lenders in its wholesale network, across 41 markets including Washington, D.C. Lender guidelines and your file decide what is available, and nothing here is a commitment to lend.
About Lendmire
Lendmire is a non-QM mortgage brokerage (NMLS# 2371349) arranging DSCR investor loans in 41 markets, including Washington, D.C., through wholesale and investor-lending channels. DSCR loans are evaluated by the lender on rental income rather than personal income, subject to lender guidelines — a fit for LLC-owned portfolios, self-employed investors, and operators scaling beyond conventional loan caps. Recognized as a Scotsman Guide Top Mortgage Workplace in 2025 and 2026.
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References
1. SavingsGrove
2. CFPB: What is a balloon payment? When is one allowed?
This article is part of Lendmire’s hard money loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: Does a Hard Money Bridge Loan on a 2-4 Unit Need a Down Payment? · Can You Use a Hard Money Loan to Buy and Flip a House? · Can a First-Time House Flipper Get a Hard Money Loan?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Legal disclosures. Lendmire (NMLS# 2371349) is a state-licensed mortgage brokerage that arranges financing through wholesale lender relationships. Lendmire is not a direct lender, depository institution, or registered financial advisor. The discussion above is general informational content about real estate financing — it is not financial, legal, or tax advice, and readers should consult licensed professionals for guidance on their individual circumstances. Loan inquiries are subject to lender underwriting; this article does not represent a commitment to lend. Loan terms, rates, and qualification standards vary by borrower, property, and state, and are subject to change at any time. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.