If you’re an investor planning a Fix & Flip, New Construction, or short-term bridge project, chances are you’ve heard the term interest-only loan. But what does it actually mean, and why do so many real estate investors prefer this structure over a traditional loan?
At Finance of America Commercial, interest-only loans are built into the foundation of our short-term lending programs. They’re flexible, fast, and designed to help investors keep more cash available during their projects. Whether you’re buying, building, or rehabbing, understanding how these loans work can help you plan smarter, move faster, and protect your bottom line.
Let’s break down what an interest-only loan is, how it works, and why it’s such a powerful financing tool for real estate investors.
What Is an Interest-Only Loan?
An interest-only loan is exactly what it sounds like: a loan where you pay only the interest each month for a set period, rather than paying down both principal and interest like a traditional mortgage.
That means during the term (usually 12 to 24 months), your monthly payments stay low and predictable. The principal balance remains unchanged until the end of the term, when you either:
- Sell or refinance the property, and pay off the loan in full (a “balloon payment”), or
- Pay it off early once the project is complete.
Because these loans are short-term and purpose-built for investment projects, the structure is ideal for investors who are expecting a quick turnaround.
Example:
Let’s say you borrow $400,000 at 10% interest for a 12-month fix & flip.
- With a traditional amortized loan, you’d pay principal + interest monthly (roughly $5,300/month).
- With an interest-only loan, you’d pay only the interest ($3,333/month)—freeing up nearly $2,000/month in cash flow.
That additional liquidity can instead be used for renovations, holding costs, or your next acquisition.
How Interest-Only Loans Fit Different Investment Strategies
Interest-only loans aren’t “one size fits all.” They’re designed specifically for the short-term nature of investor projects, where speed, flexibility, and cash efficiency matter most.
1. Fix & Flip Investors
For investors buying undervalued homes to renovate and resell, interest-only loans are the perfect match.
- For most projects, you pay only interest on funds disbursed while completing renovations.
- Once the property sells, you pay the principal off in full.
- Since projects typically last just 6–12 months, the interest expense is minimal compared to a 30-year loan.
Investor Tip: Because these loans have no prepayment penalties, you can sell and close out the loan early without any extra cost.
2. Ground-Up Construction
Building from the ground up involves months of permitting, site work, and phased construction. Interest-only loans align perfectly with that cycle.
- Similar to Fix & Flip, you pay interest only on the funds drawn (not the full approved amount).
- As construction progresses, additional draws are released and payments are adjusted accordingly.
- Once the project is complete, you refinance into a long-term product or sell the property.
This structure keeps monthly obligations predictable while your capital is tied up in development.
3. Stabilized Bridge Loans
When investors need quick access to capital—say, to purchase an income-producing property before refinancing—it’s not practical to make principal payments right away.
That’s where interest-only bridge loans shine:
- Short-term (typically 12–24 months)
- Interest-only payments while repositioning or stabilizing the property
- Balloon payoff at sale or refinance
Bridge loans buy you time to transition between acquisitions, leases, or long-term financing without straining cash flow.
Why Interest-Only Loans Are Investor-Friendly
The biggest misconception about short-term loans is that their rates are “too high.” But that’s comparing apples to oranges.
Interest-only loans are designed for short timeframes, and you’re paying interest only for the months you actually use the money.
Here’s why the rate doesn’t tell the whole story:
- Short-Term Cost, Not Lifetime Cost: Paying 10–11% for 6–12 months on a flip is often cheaper than locking into a lower long-term rate for years.
- You’re Only Paying Interest: With no principal payments, you free up thousands in monthly cash flow.
- No Prepayment Penalties: Finished and sold early? Pay it off early—no penalty, no wasted interest.
- Better Leverage: Since funds can cover both purchase and rehab costs, your personal out-of-pocket capital remains low.
When viewed in terms of total project ROI, the “cost” of short-term capital is minimal compared to the value it unlocks.
Example: Real Numbers in Action
Let’s say you’re flipping a property expected to sell for $500,000 after rehab.
- Purchase Price: $350,000
- Renovation Costs: $50,000
- Loan Amount: $360,000 (90% LTC, 100% rehab)
- Loan Term: 12 months interest-only
- Interest Rate: 10%
Your total monthly interest payment = $3,000.
Even if you hold the loan for 8 months, your total interest paid is $24,000.
If your net profit after the sale is $70,000, your return on cash invested remains strong, and you avoid tying up hundreds of thousands in personal funds.
How FACo’s Interest-Only Loans Work
structures designed to maximize your flexibility and control.
We offer interest-only terms on:
Standard Features:
- 12–24 month terms (customizable based on project needs)
- Interest-only monthly payments
- Balloon payment at maturity or early payoff
- No prepayment penalties
- Fast closings and flexible draw schedules
This structure gives you full control over your timeline and exit strategy—whether you’re selling, refinancing, or scaling into your next project.
The Bigger Picture: Why Smart Investors Leverage Short-Term Debt
Interest-only loans aren’t about avoiding payments, they’re about aligning your financing with your project’s lifecycle.
By keeping payments lean during renovation or build phases, you preserve working capital for materials, labor, or marketing. When the project sells or stabilizes, you then transition into long-term financing or move on to your next deal.
It’s a cycle that powers portfolio growth and scalability, allowing investors to take on more projects without overextending themselves financially.
And because FACo offers full in-house solutions, from acquisition through refinance, you can move seamlessly from an interest-only bridge loan into a long-term DSCR or rental loan once your property is stabilized.
Final Takeaway
Interest-only loans are one of the smartest tools in a real estate investor’s financing toolkit. They reduce monthly expenses, improve cash flow, and keep your capital available where it’s needed most—inside your projects.
With flexible terms, fast closings, and no prepayment penalties, they’re designed to match the rhythm of real estate investing: short, efficient, and results-driven.
At FACo, our short-term programs are built around this principle. Whether you’re flipping, building, or bridging to your next opportunity, our interest-only loans give you the speed and simplicity to keep momentum on your side.
Ready to get started? Explore our Fix & Flip, Ground-Up Construction, and Stabilized Bridge loan programs, or connect with our team to find the best financing fit for your investment goals.
