Interest only investor loans are loans where the monthly payment covers interest and nothing else. You borrow a balance, you pay the interest on it each month, and the principal stays exactly where it started until you pay it off in one go. On a short-term investor loan, that payoff comes from selling the property or refinancing it.
That is the standard structure for bridge, fix and flip, and ground-up construction loans, and for good reason: the loan exists for a project measured in months, and the money that would otherwise go to principal is better spent on the renovation. The trade is simple. Lower payments while you work, in exchange for owing the whole balance at the end. Whether that trade works for you depends almost entirely on whether your exit is real.
How interest only investor loans work on short-term deals
A conventional mortgage amortizes. Each payment is part interest and part principal, and over thirty years the balance runs down to zero. That is the right design for an owner who plans to live in a house for a long time.
A flip is the opposite. You buy a property, renovate it, and sell it or refinance it, usually inside a year. Amortizing a loan like that would mean sending the lender a slice of principal every month on a balance you are going to repay in full in a few months anyway. It accomplishes nothing except tying up cash during the stretch of the project when cash is tightest.
So short-term investor loans are almost always interest only:
- Fix and flip loans. You pay interest monthly through the renovation. The principal is repaid from the sale proceeds at closing.
- Bridge loans. Same structure, used to buy or hold a property until a sale or a long-term loan takes it out.
- Construction loans. Interest only through the build, with the balance repaid when the finished project sells or refinances.
- The bridge half of a BRRRR. Interest only while you renovate and lease up, then paid off by the long-term refinance.
The balance due at maturity is often called a balloon, because the final payment is far larger than every payment before it. On an interest only loan with no principal paid along the way, the balloon is the entire principal.
Interest on drawn funds versus the full loan
This is the detail inside interest only investor loans that changes the real cost more than most borrowers expect, and it is worth asking about directly.
A purchase and rehab loan has two parts: the money that funds at closing toward the purchase, and the rehab money released in draws as work is completed. Across the market, lenders handle the interest on that second part in one of two ways.
Interest on the full commitment. Interest is charged on the entire loan amount from day one, including rehab funds the lender is still holding. In the industry this is often called Dutch interest. Your monthly payment is the same in month one as in month six, and it is the higher number throughout.
Interest on drawn funds. Interest is charged only on the money actually advanced. At closing you pay interest on the purchase portion. As each draw is released, the balance grows and the payment grows with it. Early months are cheaper; by the final draw you are paying on nearly the full amount.
Neither is automatically better. The difference is small on a short, light rehab and meaningful on a long project with a large renovation budget, because that is where undrawn money sits for months. What matters is that you know which one you are signing and model the right one. It should be stated plainly in the written term sheet; if it is not, ask before you sign.
An illustrative example
To make this concrete, here is one example with round numbers. It is illustrative only, not a quote, and the interest itself is left as "the monthly interest payment" because the rate is set per deal.
Say you buy a house for $200,000 with a $60,000 renovation, and the loan funds $180,000 at closing toward the purchase plus the full $60,000 of rehab in draws: a $240,000 loan in total.
- Months one and two. Demolition and rough work, paid by you and not yet reimbursed. If interest runs on drawn funds, you are paying the monthly interest payment on $180,000. If it runs on the full commitment, you are paying it on $240,000.
- Months three to five. Draws come through as stages are inspected. On a drawn-funds loan, the balance climbs toward $240,000 and the monthly interest payment climbs with it.
- Month six. The house sells for $350,000.
At closing, the sale proceeds repay the full $240,000. Not a dollar of principal came off in the meantime, which is the whole point: every monthly payment went to interest, and the renovation got your cash instead. What you keep is the sale price less the $240,000, the down payment and cash you already put in, the interest you paid, every other holding cost, and the cost of selling.
Now run the same deal with the sale in month nine instead of month six. The principal does not change. What changes is three more monthly interest payments, three more months of taxes and insurance, and a maturity date that may now be closer than the closing. That is where interest only stops being a convenience and becomes a deadline.
Why interest only helps cash flow during a rehab
Every dollar that does not go to principal stays in the project. During a renovation, that is the difference between paying the electrician on time and asking him to wait.
It matters most because of how draws work. On a fix and flip loan with me, rehab is reimbursed against completed work: you fund each stage, the work is inspected, and the draw is wired the same day. That means you are carrying the cost of the current stage out of your own pocket at the same time as the monthly payment. Keeping that payment to interest only is what makes the cycle workable for an investor who is not sitting on a large cash pile.
I have run projects on both sides of this. The months that hurt are never the quiet ones at the end. They are the middle months, when the walls are open, the next stage needs paying before the last draw lands, and the house produces no income at all. A lower monthly payment does not make a bad deal good, but it does keep a good deal from running out of cash halfway through.
The risk: no principal paydown and a balloon at maturity
The flip side of interest only investor loans is the same feature seen from the other end. You are not building equity through the loan. Every bit of equity in the project comes from your down payment and from the value the renovation creates. If the value does not arrive, the loan balance is still all there.
That makes three things non-negotiable:
A real exit. The balloon is repaid by a sale or a refinance. Not by savings, not by hope. Before you close, know what the finished property sells for based on actual comparable sales, or what it will appraise and rent for if you are refinancing. The guides on holding costs and underwriting cover how to test that.
A schedule with slack in it. The loan has a maturity date. Contractors slip, permits stall and buyers fall through. If the project runs long, the conversation to have is about an extension, and it goes much better when it happens well before maturity than on the day.
Reserves for the carry. Interest only is low compared with an amortizing payment, but it is not zero, and on a stalled project it never stops. Hold enough cash to pay it for longer than you think you need to.
None of this is unique to my loans. It is how the structure works everywhere, which is why I underwrite the exit as carefully as the purchase.
Interest only periods on long-term DSCR loans
Interest only also shows up on long-term rental financing, in a different form. Some DSCR products in the market offer an interest only period at the start of the loan, commonly several years and in some programs up to ten, after which the loan begins to amortize over the remaining term and the payment rises.
The appeal for a buy and hold investor is the same as on a flip: lower payments and more cash flow early on. The risks are different. There is no balloon in the short term, but there is a payment increase built into the loan, and the rent has to support the higher payment when it arrives. Lenders also differ on how they qualify these loans: some calculate the debt service coverage ratio on the interest only payment, others on the higher amortizing payment. That choice can decide whether a property qualifies at all, so ask.
Whether any particular DSCR loan has an interest only period, and on what terms, is a question for that loan's term sheet. Do not assume it from the product name.
How to model carry on an interest only loan
The monthly payment on an interest only loan is the easiest line in the model to get right and the easiest to get wrong, because the number is simple and the timeline it multiplies is not.
A model that holds up looks like this:
- Write down the structure. Is interest charged on drawn funds or on the full commitment? That decides whether your payment is flat or rising.
- Lay out the draw schedule. If interest runs on drawn funds, estimate when each draw will fund and what the balance will be each month.
- Multiply by a realistic hold, then add months. Use the schedule you expect, then run it again two or three months longer. Interest only does not shorten with the project; it lasts exactly as long as the project does.
- Add every other holding cost. Taxes, insurance, utilities and anything else that runs while you own the property.
- Check the exit against the full balance. The sale or the refinance has to repay all of the principal, not what is left after payments, because nothing came off.
The hard money loan calculator works out the cash you need at the table and the interest across the hold, and lets you change the timeline to see what a slow project costs. Run it at your hoped-for hold and at a pessimistic one, and plan around the second.
Rates, terms and how interest is calculated are set per deal and stated in the written term sheet. If you have a project in mind, send it over and I will tell you how I would structure it.