Interest-Only Bridge Loans: How the Payments and the Balloon Work

Why are bridge loans often interest-only?

Bridge loans are short. Paying down principal over 12 months would raise the monthly payment a lot and barely reduce the balance compared with what the exit has to cover anyway. Interest-only payments keep cash free for renovation, carrying costs and reserves during the hold, when the property usually isn't producing full income yet.

Payment structure varies by lender and by loan. Confirm it on your bridge term sheet. Axelrad Capital's Bridge Loans page has current program terms.

How do you calculate an interest-only payment?

For a simple monthly calculation:

Monthly interest = Outstanding balance × Annual rate ÷ 12

Some lenders calculate daily interest (annual rate ÷ 360 or 365 × days in the month), so payments vary slightly from month to month. Ask which method your note uses.

Here's a rule of thumb you can use with any quote. Each 1 percentage point of annual rate costs about $83 a month per $100,000 of balance.

What changes when rehab funds are drawn over time?

If renovation money is held back and released in draws, the outstanding balance goes up with each draw. If interest is charged only on drawn funds, your payment starts lower and rises as work is completed. If interest is charged on the full loan amount from closing, the payment is higher from day one. That one term can change the total interest cost of a project noticeably.

What is the balloon payment?

At maturity, you owe the full principal plus any unpaid interest and fees. On an interest-only loan, the principal at maturity is the same as the full amount you drew. Your exit has to cover it:

• Sale: sale price, minus selling costs, minus the balloon, equals your proceeds.
• Refinance: the takeout loan (the long-term loan that pays off the bridge), minus the balloon and refinance costs, equals cash in or out.

Interest-only payment and balloon worksheet

Monthly interest is the outstanding balance times the annual rate divided by 12, and the balloon is everything drawn by maturity. Enter the draws for each month, the months in the hold and your quoted rate. The exit check subtracts the balloon and exit costs from your exit proceeds.

Example: payments with and without draws (hypothetical)

Example for illustration only. To avoid implying any rate, the math is shown per 1 percentage point of annual rate. Multiply by your quoted rate.

A $300,000 bridge loan funds $220,000 at closing and holds back $80,000 for renovation, drawn in $20,000 pieces in months two through five. The hold is nine months.

• Interest on the full loan: $300,000 × 1% ÷ 12 = $250 a month for each point of rate, from month one. Over nine months, that's $2,250 per point.
• Interest on drawn funds only: month one is $220,000 × 1% ÷ 12 ≈ $183 per point. The payment rises about $17 per point with each draw, reaching $250 per point once all $300,000 is out. Over nine months, that's about $2,083 per point.

The difference is about $167 per point of rate. Multiply $167 by the rate on your quote to see the savings in dollars. The balloon at maturity is $300,000 either way.

What is an interest reserve?

Some bridge loans include an interest reserve, which is part of the loan set aside to make the monthly interest payments during the hold. It protects the investor's cash during renovation, when the property earns little or nothing. The catch is that the reserve is borrowed money: it adds to the balance, may accrue interest itself, and it all comes due in the balloon. If your term sheet includes one, ask how much it covers, what happens if the hold runs longer than the reserve, and whether unused reserve reduces the payoff.

What are the risks of interest-only bridge debt?

• No equity build from payments. Any equity you gain comes from your down payment, the work and the market, not from paying down the loan.
• Balloon risk. If the sale price or takeout amount comes in low, the shortfall is yours.
• Rate exposure. If your note has a variable rate, ask how and when it adjusts.
• Delay cost. Every extra month adds a full interest payment, with no principal reduction.

Interest-only bridge checklist

Write the lender's answer to each question, then copy the result into your deal file.

Key takeaways

• Interest-only payments cover interest, and the full principal is due at maturity.
• Monthly interest ≈ balance × rate ÷ 12. Each 1 point of rate ≈ $83 a month per $100,000.
• Interest on drawn funds only can lower costs on renovation loans. Ask how your loan works.
• Your exit has to cover the entire balloon plus costs.
• Axelrad says there are no prepayment penalties on its bridge loans.

See your actual payment

Send your deal and get terms you can plug into the worksheet. Apply here, or visit the Bridge Loans page.