Are Hard Money Loans Interest-Only?

Yes, nearly all hard money loans are interest-only, with only a few loans having a fully amortizing payment structure.

Hard money loans are mostly short-term loans used by real estate investors to bridge the gap during renovations or for owners leasing out a building with tenants to qualify for long-term bank financing. During these phases, the hard money lender will structure the loan to have interest-only payments, since the loan will only be used for a short period. If a borrower chooses, they can make an additional principal payment to pay down a portion of the loan balance. However, principal payments are usually not required.

Interest-only payments on a $500,000 loan look like this:

  • $500,000 Loan Amount
  • 12-Month Term
  • 10.00% Interest Rate
  • $4,166.67/mo (Payments 1-11)
  • $504,166.67    (Month 12 - Balloon Payment)

I mentioned that some hard money loans are fully amortizing. A fully amortized loan refers to the amount of principal and interest paid each month during the loan’s term.

The only place I’ve seen fully amortized hard money loans are on cannabis production properties. The reason hard money lenders offer fully amortized loans as opposed to interest-only loans on these niche property types is that there isn’t any institutional financing options for cannabis growers — and probably won’t be for many years. Therefore, lenders provide borrowers with the option of paying off the loan over 15 years rather than giving them bridge loans that need to be paid off or rolled over (with new loan fees) every few years.

I consider the fully amortizing cannabis grow loans as occasional one-offs that happen every few years.

In all likelihood, if you’re seeking a hard money loan, interest-only payments will apply. You’ll have 11 interest-only payments with a final balloon payment due at maturity for the loan amount plus one payment.