The Quick Read: Hard money loans are usually interest-only, which means each monthly payment covers only the interest on the funded balance, the principal never shrinks, and the entire balance comes due at maturity as a single balloon that you repay by selling the property or refinancing into long-term financing. Terms on the programs Lendmire places typically run 6 to 18 months, though that varies by lender, property, and borrower experience. Because the monthly payment is small relative to the debt, the payoff plan matters far more than the payment itself.
- The monthly payment is the funded balance times the note’s annual interest percentage, divided by twelve. It does not change unless the balance changes.
- On a rehab loan, the balance grows as draws fund, so the payment grows with it.
- The balloon is the unpaid principal plus any accrued interest, fees, and extension or default charges stated in the note.
- Extensions are written into the note at the lender’s discretion, they cost money, and they can depend on the loan being in good standing.
- The cleanest exit for a rental is a long-term DSCR loan, and the property has to pass that lender’s tests, not just the hard money lender’s.
How Interest-Only Payments Work on a Hard Money Loan
You pay interest each month, in arrears, and nothing goes toward principal. The balance on day one is the balance at maturity, unless draws added to it along the way.
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That is the whole mechanical idea. Most hard money lenders build the loan this way because the product is a short bridge. It exists to carry a purchase, a rehab, or a transition until a longer-term loan or a sale replaces it. Amortizing a loan over 30 years makes sense when the loan lasts 30 years. It makes little sense when the loan lasts a year.
For you as the borrower, this cuts two ways. Carrying costs stay low while the property is under construction or sitting vacant. But you build zero equity through paydown. Any equity you gain comes from the discount you bought at, the work you do, or market movement. The loan never helps you.
The balloon follows directly. With no principal paid, the balloon equals the amount you borrowed, plus whatever the note adds at maturity. A common mistake is assuming that twelve on-time payments made the debt smaller. They did not.
How the Monthly Payment Is Calculated
Take the outstanding balance, multiply by the note’s annual interest percentage, and divide by twelve. That gives a standard monthly interest-only payment. Multiply it by the number of months you hold the loan and you get your total interest over the term, before any fees.
Two details change the real number, and borrowers miss both:
- Accrual method. Some notes accrue interest daily on a 360-day year, some on a 365-day year, and some use a flat twelfth each month. A 360-day basis produces slightly more interest over a full year than a 365-day basis at the same stated percentage. Read the interest clause rather than assuming.
- Which balance carries interest. On most hard money notes, interest runs on the funded balance, not on the full commitment. If you were approved for a large loan but only a portion has funded, you generally pay interest on that portion. The note controls this, so confirm it before signing.
Interest paid on a business loan can matter at tax time. Tax treatment varies, so consult a qualified professional.
Funded Balance Versus the Full Commitment
On a purchase-only bridge loan, the funded balance is the whole loan from day one, so the payment is flat. On a rehab loan, the balance steps up as draws are released. Draws are reimbursements for completed work: the lender funds a portion of the rehab budget after an inspection shows the work was done.
| Stage | Funded balance | Interest-only payment |
|---|---|---|
| Closing | Purchase portion | Lowest |
| Mid-rehab | Purchase plus draws to date | Rising |
| Final draw | Full commitment | Highest |
| Maturity | Full commitment | Balloon due |
This is why a payment schedule for a rehab loan is not one flat number. It looks like a staircase. The program Lendmire works with can fund up to 100% of the rehab budget in draws against completed work, subject to lender guidelines. That figure is a rehab-budget figure, not a purchase LTV. Any borrower projecting carry should model the payment at the final-draw balance, not the opening balance.
Structures and Variations Beyond the Standard Note
The standard note is interest-only with a balloon, but variations exist, and the term sheet tells you which one you have.
| Structure | How it works | Watch for |
|---|---|---|
| Standard interest-only | Monthly interest, balloon at maturity | Exit must be ready |
| Interest reserve | Part of the loan prefunds the payments | Smaller usable proceeds |
| Deferred interest | No payments until maturity | Larger balloon |
| Amortized payment, short term | Payment sized on a long schedule, balloon at end | Payment is higher than interest-only |
An interest reserve means the lender holds back part of the loan to pay its own interest. Your out-of-pocket monthly cost drops, but the reserve is still borrowed money, so it increases what you owe. Deferred interest pushes the cost to the end and only fits a very strong deal.
The amortized-payment variant is the exception worth knowing. The payment is calculated as if the loan ran 30 years, but the loan still balloons after a short term. A small amount of principal is paid each month, so the balloon is slightly below the original loan. Most hard money you will see is plain interest-only, so do not assume this variant unless the note says so.
On the program details Lendmire works with, hard money terms run 6 to 18 months, interest-only, with no prepayment penalty. These details vary by lender, property, and experience, and nothing here is a commitment to lend. Always check whether a given note carries a minimum-interest clause, since that changes the cost of paying off early.
Key Terms Defined
Balloon payment: the lump sum of unpaid principal and other charges due in one payment when the loan matures.
Maturity: the date the note says the full balance must be repaid.
After-repair value (ARV): the lender’s estimate of what the property will be worth once the planned rehab is finished.
Loan-to-cost: the loan amount as a share of the total project cost, which is purchase price plus rehab budget.
Draw: a release of rehab funds after the lender confirms the work was completed.
Interest reserve: money held back from the loan to cover the interest payments.
DSCR: debt service coverage ratio, which compares a property’s rent to its monthly debt payment and is how long-term rental loans are sized.
Seasoning: the waiting period a long-term lender wants after you take title before it will refinance the property.
What You Owe When the Term Ends
At maturity, you owe the unpaid principal, any interest accrued since the last payment, and any fees the note adds. If you extended, you owe the extension charge. If you were late, you may owe default interest and late fees on top.
The payoff statement is the document that spells out the exact number. Request it from the lender before the payoff date, not on it. Interest accrues daily or monthly depending on the note, so the number moves slightly depending on the date of payment. Title companies and refinance lenders need that statement to schedule the payoff.
The leverage you started with also shapes this number. On the hard money program Lendmire places, fix-and-flip loans typically run 85% to 93% of project cost depending on documented completed projects, and each tier is capped at 75% of after-repair value on non-owner-occupied residential. A refinance or cash-out on hard money runs up to 65% of value, and a bridge purchase with no rehab runs up to 80% of purchase price. The top tier is reserved for experienced investors, and all of these vary by lender, property, and experience. The point for payment planning is simple: a higher-leverage loan means a bigger balloon against the same property value, which leaves less room if the exit slips.
The Months Before the Balloon
Treat the term as a calendar with checkpoints rather than a single deadline. The table below uses a 12-month term as an example. Shorten or stretch the checkpoints to match your note.
| Point in the term | What to confirm |
|---|---|
| Month 1 | Exit route chosen: sale or refinance |
| Month 3 | Work schedule matches the term |
| Month 6 | Lease signed or listing prepared |
| Three months before maturity | Refinance lender or buyer lined up |
| Final month | Payoff statement requested |
The most common failure is a schedule that fits only if nothing goes wrong. Permits slip, contractors slip, and appraisals and lease-ups take time. A term that matches your best-case timeline exactly has no cushion. Since terms on the program Lendmire places run 6 to 18 months, the right question is not “what is the shortest term I can take” but “what term survives a delay of a few months.”
Brokers see this pattern repeatedly across files. The investors who run into trouble rarely misjudged the payment. They misjudged how long the project and the takeout loan would take. The ones who work it out before closing usually spend less on extensions.
If You Can’t Pay at Maturity
You have four realistic paths: pay off, extend, refinance, or default. Only the first three are good outcomes.
Extension. Many notes include an extension option written up front, and it costs money. The lender decides whether to grant it, and some extensions depend on the loan being in good standing or on hitting a performance milestone. An extension is therefore a plan B you price in, not a right you can count on. During an extension, interest continues to accrue, and the note states the terms.
Refinance. This is the exit for most rental investors. The takeout lender evaluates the property fresh, so the hard money balance does not set the new loan size. The sizing rules for a DSCR takeout appear in the exit-planning section below.
Sale. For a flip, the sale proceeds repay the loan. The listing has to be live early enough that a contract and closing land before maturity.
Default. Missing the balloon puts the loan in default. Default interest, which the note sets well above the standard payment, can begin to accrue, and the lender can start foreclosure on the collateral. The specific terms are in the note, so read the default clause before you sign.
The practical point is that an exit plan of “I may rent it or sell it” is not a plan. A lender wants one primary route, documented, with a realistic backup.
Where the General Rule Breaks
The “interest-only, then balloon” description holds for most files, but several edge cases change the mechanics.
Rehab draws. As covered above, the payment is not flat on a rehab loan. It rises with each draw.
Amortized-payment notes. If the payment is sized on a long schedule, the balloon is below the original principal. These are uncommon.
Conditional extensions. If an extension depends on the loan meeting a coverage or occupancy test, it may not be available when you need it. Ask what the test is before you rely on the extension.
Ground-up construction. On the program Lendmire works with, ground-up construction is the one product that can run beyond four units, up to 10, with leverage tied to completed projects. The draw schedule is longer, so the balance steps up over a longer stretch.
Owner-occupancy and the business-purpose frame. Hard money through this program is for non-owner-occupied residential property, 1 to 4 units for standard purchases and rehabs, and it is a business-purpose loan, reviewed differently from a standard owner-occupied mortgage. That classification is not automatic for every rental. The CFPB’s commentary on the business-purpose exemption says the creditor must determine in each case whether the credit is primarily for a business purpose. For owner-occupied rental property, Compliance Alliance’s summary of that commentary says an acquisition counts as business purpose only if the property has more than 2 units, and an improvement loan needs more than 4. Owner-occupied property sits outside the hard money program described here, so the practical lesson is to keep the purpose and occupancy of the loan clean.
Property types. The program covers non-owner-occupied residential. Commercial, industrial, land, hospitality, and owner-occupied properties are not on the sheet.
Planning the Exit Into a DSCR Loan
For a rental, the exit that pays hard money off is usually a DSCR loan, a long-term mortgage sized primarily on the property’s rent. 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 figures below are for the DSCR loan, not for hard money, and they vary by lender, borrower, property, and file. Nothing here is a promise to lend.
- On a DSCR cash-out refinance of an investment property, the DSCR loan typically tops out at 75% LTV. On a DSCR rate-and-term refinance, which returns no cash at closing, the ceiling is higher, up to 85% LTV.
- A DSCR loan typically expects about 6 months of seasoning before a cash-out, measured from when title was recorded.
- A DSCR loan starts at 1.00 coverage on select programs, meaning rent used for lender review equals the full monthly obligation of principal, interest, taxes, insurance, and any association dues. A separate select-lender path takes coverage below 1.00, with leverage and terms adjusted.
- A DSCR loan typically wants a credit score of about 660, with 620 as a floor in parts of the network and 700 or higher opening the strongest leverage tiers.
- A DSCR loan typically requires about 6 months of reserves, rising to about 9 months above $1,500,000.
- A DSCR loan runs up to $3,000,000 on standard programs.
Where the two loans differ, say so plainly. Hard money is sized on cost and after-repair value and looks at the plan. A DSCR loan is sized on appraised value and rent and looks at the lease. A property that cleared the hard money lender’s inspection can still miss the DSCR lender’s tests if it has no lease, if rent comes in light, or if reserves are short.
Two further cautions. First, clearing 1.00 coverage does not mean the property produces positive cash flow, because repairs, vacancy, management, utilities, and capital expenses sit outside the calculation. Second, manufactured homes, log homes, and barndominiums fall outside these DSCR programs, so a project on one of those has no DSCR exit.
The timing mistake is worth repeating. If the hard money term ends the same month the seasoning window ends, a single slipped permit pushes you into an extension or default. Build the cushion in at the start. The complete DSCR loans guide covers the long-term side.
Questions to Ask Before You Sign
Use this list on any term sheet. The answers tell you more than the headline terms do.
- Does interest accrue on the funded balance or the full commitment?
- Is accrual daily or monthly, and on a 360-day or 365-day basis?
- Is there an interest reserve, and does it reduce my usable proceeds?
- Is there a minimum-interest clause, and is there any prepayment charge?
- Is an extension written into the note, what does it cost, and what conditions apply?
- What does default interest add to the balloon?
- How do I request a payoff statement, and how far in advance?
- Does the note match the program’s stated term, and does it leave a cushion over my project schedule?
Run the Exit Before You Close
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, covering 41 markets, including Washington, D.C. You can reach the team at 828-256-2183.
Frequently Asked Questions
Are all hard money loans interest-only?
Most are, but not all. Some notes use an amortized payment with a balloon at the end, and a few defer interest until maturity. The term sheet states which structure applies, so check the payment clause rather than assuming.
Does the balloon equal the original loan amount?
On a standard interest-only note, yes, plus any accrued interest, fees, and extension or default charges. On a rehab loan, it equals the full funded amount, including all draws. Principal falls below the starting amount only when the note amortizes the payment or you choose to prepay.
Can I pay extra principal during the term?
Generally yes, and on the program Lendmire places there is no prepayment penalty, though terms vary by lender. Extra principal lowers the balance that interest accrues on. Check for a minimum-interest clause, since that can set a floor on what you pay even if you pay off early.
What happens if I need more time than the term allows?
You ask for an extension, if the note includes one. The lender decides, the extension costs money, and it may depend on the loan being current or on a performance test. If neither works, refinancing or selling are the remaining routes, and default is the outcome to avoid.
Will a long-term DSCR loan automatically pay off my hard money?
No. The DSCR lender reviews the property on its own, including appraisal, lease, coverage, credit, reserves, and seasoning. It sizes the new loan from the property’s value and rent, not from the old payoff balance, so the new loan can come in below what you owe.
About Lendmire
Lendmire (NMLS# 2371349) is a mortgage brokerage focused on DSCR investor financing, helping arrange programs through wholesale and investor-lending channels in 41 markets, including Washington, D.C. DSCR loans are evaluated by the lender on property cash flow rather than personal income, subject to lender guidelines, supporting LLC closings and accommodating investors with four or more financed properties. Scotsman Guide Top Mortgage Workplace in both 2025 and 2026.
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References
1. CFPB – Regulation Z § 1026.3 commentary
2. Compliance Alliance – Regulation Z and Investment Properties
This article is part of Lendmire’s hard money loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: Hard Money Loan Structure Requirements for Interest-Only Balloon Deals · How a Hard Money Lender Counts Equity as a Flip Down Payment · How a Hard Money Lender Counts a Seller-Financed Down Payment
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Important disclosures. Lendmire (NMLS# 2371349) is a licensed mortgage brokerage. Lendmire is not a direct lender, depository institution, or financial advisor. All loan inquiries are subject to lender underwriting; this article does not constitute a commitment to lend. Rates, terms, and program guidelines are subject to change without notice and vary by borrower profile, property type, and state. Information in this article is general in nature and is not financial, legal, or tax advice. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.