Understanding Interest Only Loans

Learn more about how interest only loans work, the benefits and risks, and when it is most appropriate to obtain this type of financing.

An interest only loan is when the borrower is required to make interest only payments while making no principal reduction. This type of loan is typically used for commercial real estate loans, and specifically most often with bridge loans, value-add renovations, and construction loans. Interest only loans are appropriate when there is a gap between the purchase, or construction, of a property and the time at which it begins producing steady income.

Benefits

The main benefit of interest only loans is that they allow for the borrower to hold onto their capital. This would be necessary for an investor who is waiting to secure cash flow from a property in order to afford an amortizing payment. Another reason might be that construction and/or renovations to the property have not yet finished, therefore the reduced loan payments can help the borrower better cash flow to finalize the project. Lastly, a borrower would benefit from an interest only loan while they wait for a property to be sold or refinanced.

Risks

Interest only loans are typically short-term, lasting 12 to 36 months. Another downside of interest only payments is that they do not reduce the loan’s principal balance. This can be risky if the value of the property declines, leaving the borrower responsible for paying more than what the property is worth.

Tips For Success

  • Implement a value add business plan

  • Keep your underwriting conservative

  • Complete extensive research on market factors influencing your property

  • Maintain a healthy credit score

  • Choose a lender who is direct and provides extensive knowledge and experience working with interest only loans

Interest only loans can be very useful in certain situations, however, as with any investment financing, you’ll want to be aware of the potential risks and stay ahead of the game as much as possible.

Palm trees in LA against a pink/blue sky.

About CALCAP Lending

A division of CALCAP Advisors, CALCAP Lending benefits from the expertise of a seasoned team of professionals with extensive, successful track-records covering a variety of disciplines and leading large, nationally-recognized institutions. A private money direct lender, CALCAP Lending provides short to mid-term financing for property investors and businesses looking to purchase, refinance, renovate, and construct residential or commercial properties.


Lending FAQs

You've got questions, we've got answers.

What is private money lending?

Private money lending is a collateral-based lending strategy that is often associated with shorter terms and more attractive features. A private money loan offers more flexibility than a conventional mortgage or bank loan.

How does a private money loan work?

Private money lenders provide financing using money from private entities. Private money loans often work as bridges to help investors gather funds to achieve their short term real estate goals, but long term, permanent options may also provide.

Why would I choose a private money lender?

There are many advantages to using a private money lender for your real estate investments! Private money lenders can be more lenient when it comes to borrower credit issues, often there are no prepayment penalties, you can leverage your cash to buy multiple properties, and private money loans are quicker when compared with institutional loans.

Can I get prequalified for a loan?

CALCAP has a responsive loan team who are able to prequalify you. Contact a loan specialist at 833.816.5580 to get started.

How long does the lending process take?

Private money lending can be a quick and painless process. From start to finish, 30 days is common, however, turn around times can be as short as 10 business days.

Can I still be approved for a loan if I have bad credit?

Generally yes, we understand that people have temporary financial issues that come up, and we want to work with you to help you rise up financially to a better place. Offsets to credit concerns may include experience as a real estate investor, good cash reserves, and/or larger down payments.

I am a broker or investor, how can I work with CALCAP?

Business is built on relationships. Ours is no different. CALCAP Value and Preferred Partners receive exclusive rates and services. For more details and to submit your application, visit our partners page.

The side of a tall apartment building lit by the sun.