The Quick Read: On a hard money fix and flip loan, interest-only means the monthly payment covers only the interest that has accrued, and the principal balance stays flat until the loan matures. The full balance then comes due as a balloon, paid from a sale or a refinance. Interest-only is the standard structure on these loans, not a special request. What matters most is how interest accrues while rehab money is still undrawn.
- Principal does not shrink during the term, so the exit plan carries the whole deal.
- Terms run 6-18 months, interest-only, with no prepayment penalty, varying by lender, property, and experience.
- Whether interest accrues on drawn funds only or on the full commitment changes your carry.
- Rehab money is held back and released in draws after completed work.
- Many investors who keep the property refinance into long-term DSCR financing at maturity.
What Interest-Only Means on a Flip Loan
An interest-only loan is one where scheduled payments cover only interest for a set period. The CFPB’s mortgage key terms page defines it that way. It defines a balloon loan as one with a larger one-time payment, typically at the end of the term. And it warns that a borrower who can’t pay the balloon may have to refinance, sell, or face foreclosure.
What this loan actually costs to carry.
Hard money is sized against the project and priced by time. Enter the deal and see how much the program will lend, the cash required at closing, the carry while you hold it, and what is left at the exit.
Leverage tiers on the current program: 85% with fewer than 2, 90% with 2 or more, 93% with 5 or more completed projects — every tier capped at 75% of after-repair value. Loan amounts up to $5,000,000, larger by exception; terms of 6 to 18 months, interest-only, no prepayment penalty. The rehab portion funds in draws against completed work, not at closing.
Program parameters shown update from Lendmire’s centralized guideline source. Rate, points, and months are editable assumptions, not quoted terms.
Cost cap sets the loan · positive spread
Illustrative estimate only — not a quote, Loan Estimate, approval, or commitment to lend. Rate, points, and months are editable assumptions. Hard money is business-purpose financing for real estate investors, not a consumer mortgage. Leverage on the current program tops out at 93% of project cost for investors with a documented track record, capped at 75% of after-repair value, with rehab funding up to 100% of the documented budget released in draws; actual terms vary by lender, borrower experience, property, and exit. Lendmire is a mortgage broker, not a lender.
Flip loans are built around that structure. You buy, rehab, and sell in months. Paying down principal over that stretch accomplishes almost nothing, so the lender sets the note as interest-only with a balloon at maturity. Across the hard money files the wholesale network sees, the structure is the baseline. The negotiation is over the details around it.
One distinction matters. Interest-only is not negative amortization. Negative amortization happens when payments fall below the interest due and the balance grows. A standard flip loan keeps the balance flat. If a term sheet shows a balance that rises, read it again.
Key Terms Defined
Interest-only period: The stretch of the loan when payments cover accrued interest and nothing else.
Balloon payment: The single large payment of the full remaining principal at maturity.
Draw: A release of held-back rehab money after the lender confirms completed work.
Holdback: The part of the loan reserved for rehab and released in draws instead of at closing.
Interest reserve: Money set aside at closing to cover some months of interest payments. Whether one is required varies by lender.
Loan-to-cost: The loan amount measured against the total project cost, not the property value alone.
After-repair value (ARV): The estimated value of the property once the work is done.
How the Payment Is Built, Step by Step
The payment is simple arithmetic. Take the interest-accruing balance, apply the note’s interest terms, and divide by the payment schedule. Principal stays flat. This article leaves out the pricing itself. Your term sheet carries it, and the loan calculator on the site gives an illustrative estimate.
What changes the outcome is which balance accrues interest.
1. Funding in two parts. The purchase advance funds at closing. The rehab budget sits in a lender-controlled holdback.
2. Draws release the holdback. On most files, up to 100% of the rehab budget funds in draws against completed work. That is a rehab-budget figure, not a purchase loan-to-value.
3. Interest follows the balance the note names. Under drawn-balance interest, the payment starts low and steps up with each draw. Under full-loan interest, sometimes called “Dutch” interest, the whole commitment accrues from day one, including undrawn rehab money.
4. The float gap appears. Borrowers usually pay contractors first, then get reimbursed after inspection. That timing gap is cash you carry yourself.
5. Maturity arrives. The whole principal is due. The exit is a sale, or a refinance into longer-term financing.
The term sheet answers the accrual question. If it doesn’t, ask in writing before you sign. The promissory note controls, along with the loan agreement, rehab budget, and draw policy.
Drawn-Balance vs. Full-Loan Interest
| Feature | Drawn-balance | Full-loan (“Dutch”) |
|---|---|---|
| Interest accrues on | Funds released so far | Whole commitment |
| Early monthly carry | Lower | Higher |
| Carry over time | Steps up with each draw | Flat |
| Budget risk | Rises as draws pile up | Front-loaded |
| Best for | Slow, phased rehabs | Fast, light-rehab projects |
Neither is better in every case. A heavy rehab that draws slowly favors drawn-balance. A light cosmetic job that draws almost everything in the first weeks makes the two nearly identical.
Interest-Only vs. Amortizing
| Factor | Interest-only flip loan | Amortizing loan |
|---|---|---|
| Payment covers | Interest | Interest plus principal |
| Balance over time | Flat | Declines slowly |
| Equity growth | Appreciation and value-add only | Appreciation plus paydown |
| Endpoint | Balloon at maturity | Paid off by schedule |
| Fit | Short hold and sale | Long hold |
Over 6-18 months, an amortizing schedule would retire very little principal anyway. The interest-only structure keeps monthly carry lower while the property earns nothing. That is the whole logic.
Some term sheets show payment math on a 30-year amortization schedule and still balloon at the end. Don’t assume. Check each one.
Where the General Rule Breaks
The standard picture holds on most files. These are the edges where it doesn’t.
Interest on undrawn funds. Some lenders charge it, some don’t. This single term can move your carry more than anything else on the sheet.
Deferred or reserved interest. A few lenders collect no interest until maturity. Others build in a full or partial interest reserve at closing. Both are lender-specific. A deferred structure usually only works on a strong deal.
Minimum interest periods. The program here carries no prepayment penalty, varying by lender, property, and experience. But some lenders elsewhere set a minimum interest period, so an early payoff doesn’t always stop the clock right away. Read the prepayment language.
Extensions. An extension is the lender’s call, not your right, and it usually carries a cost. Flips overrun. Budget for the chance that you need one, and ask how it is priced before you sign.
Business purpose vs. consumer purpose. Hard money flip loans are business-purpose loans. They are reviewed differently from a standard owner-occupied mortgage. The eCFR text of 12 CFR 1026.3 exempts credit extended primarily for a business or commercial purpose, and credit to someone other than a natural person. Purpose controls, not borrower type, as the ABA Banking Journal explains. That is why consumer interest-only and balloon limits don’t frame these notes. The terms come from the note itself. This is a general description, not legal advice.
Government rehab programs. Some government-backed renovation loans use their own draw and holdback rules. Private flip lenders set theirs independently, so don’t carry one program’s draw terms over to the other.
What the Program Looks Like in Practice
Parameters vary by lender, property, and experience, and nothing here is a commitment to lend. Typical figures on the program Lendmire brokers:
- Leverage: fix-and-flip loans run 93% of project cost at 5+ completed projects, 90% of project cost at 2+ completed projects, and 85% of project cost with fewer than 2, every tier capped at 75% of after-repair value.
- Rehab funding: up to 100% of the rehab budget in draws against completed work.
- Terms: 6-18 months, interest-only, no prepayment penalty. No multi-year options exist on the current program.
- Credit: 620 minimum score, with additional conditions below 660. Underwriting is asset-based: the property, the plan, and the exit.
- Collateral: non-owner-occupied residential, 1-4 units.
- Loan size: up to $5,000,000, larger by exception.
There is no true 100% purchase program. The top leverage tier is reserved for experienced investors. First-time investors qualify at the lower tiers.
The Investor Decision
Interest-only keeps carry low, but it moves the risk to the end. The principal never shrinks, so the exit decides everything.
Three habits keep files clean:
1. Build carry into the budget as its own line. Stress-test it for a schedule that runs long, not the schedule you hope for. Holding costs compound when renovation slips.
2. Confirm the accrual method in writing. Ask whether interest runs on drawn funds or the full loan. Ask about any interest reserve at closing.
3. Line up the takeout before you rehab. If you plan to sell, price the property against comps early. If you plan to keep it, talk to a refinance lender before the work starts.
For investors who keep the property, many refinance out of hard money into long-term DSCR financing once the property is stabilized, and Lendmire brokers that path. DSCR compares rent to the full housing payment, so run the post-rehab rent against that number first. Lendmire’s complete DSCR loans guide walks through how that refinance is built. Coverage clearing the baseline does not mean the property cash flows after repairs, vacancy, and management. Those sit outside the calculation.
Questions to Ask Any Lender
- Does interest accrue on drawn funds or the full commitment?
- Is an interest reserve required at closing, and how many months?
- What is the draw process, and what does each draw cost?
- How is an extension priced, and who decides?
- What happens if I pay off early?
- What is the default treatment at maturity?
Frequently Asked Questions
Does the loan balance go down on an interest-only flip loan?
No. Payments cover accrued interest only, so principal stays flat until the balloon at maturity. Equity builds only through the value you add and any market appreciation.
Is the monthly payment fixed?
Not always. Under drawn-balance interest the payment rises with each draw. Under full-loan interest it is flat but higher from day one. The note states which method applies.
Can I pay off early to save interest?
On the program Lendmire brokers there is no prepayment penalty, though this varies by lender, property, and experience. Interest generally stops accruing once the loan is paid. Always confirm any minimum interest period in the note.
What happens if the flip doesn’t sell before maturity?
The balloon still comes due. Your options are a sale, a refinance, or an extension if the lender grants one, usually at a cost. Planning the exit before you start is the better protection.
Do consumer mortgage limits on interest-only apply to flip loans?
Generally no. Business-purpose loans sit outside that framework, so terms come from the note.
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. Lendmire is a broker arranging financing through select lenders in its wholesale network across 41 markets, including Washington, D.C.
About Lendmire
A non-QM mortgage broker (NMLS# 2371349), Lendmire arranges DSCR financing for real estate investors in 41 markets — 40 states plus Washington, D.C. Because deals are underwritten primarily on property cash flow rather than personal income documentation, the structure suits self-employed buyers and entity-owned portfolios. Lendmire places loans through wholesale investor lenders; it is not a direct lender. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
Hard money often opens the deal, and a refinance typically closes the chapter – see the hard money loan overview.
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Informational only. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
References
1. CFPB – Mortgage answers: key terms
3. ABA Banking Journal – Compliance question of the month
This article is part of Lendmire’s hard money loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: Is a Hard Money Fix and Flip Loan Worth It for a Business Owner? · Can You Buy a Flip in an LLC With a Hard Money Loan? · Does a Hard Money Bridge Loan on a 2-4 Unit Need a Down Payment?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Required disclosures. Lendmire (NMLS# 2371349) operates as a licensed mortgage broker, not a direct lender or depository. The discussion in this article is general in nature and should not be relied upon as financial, legal, or tax advice — every investment scenario is unique and should be reviewed by a qualified professional. Any loan inquiry is subject to lender underwriting, and this article is not a commitment to lend or a guarantee of approval. Mortgage rates, loan terms, and program guidelines vary by borrower, property, and state, and may change without notice. Equal Housing Opportunity. Verify licensure at NMLS Consumer Access.