When Is a 7.95% Rate on Your Fix and Flip Loan Better than a 6.95% Rate? Here’s How Lenders Trick You with Deceptively Low Rate Offers

Is that a trick question?

A 6.95% rate is always going to beat a 7.95% rate, that’s grade school math, right? That’s what some lenders want you to think when they advertise a low rate, but that’s not always the case.

The problem is in the fine print, specifically relating to how the interest rate is applied to the loan principal. Here’s what you need to know to understand whether the low rate you’re offered is really the lower payment amount you’re expecting.

The Basics

Many fix and flip loans are structured with a construction reserve: the larger part of the loan is allocated toward the purchase of the property, while the remainder is for construction expenses and is not actually needed until many months later.
For these loans, there are generally two ways interest is charged:

Interest is charged on the FULL loan amount from day 1 (a “full boat” loan, also known as “Dutch interest”).
Interest is charged on the funds of a loan ONLY as they are disbursed to the borrower (“as disbursed” loan).

When comparing a “full boat” loan versus an “as disbursed” loan, what you pay looks very different in the end. That’s exactly how a “low rate” offer can turn out to be anything but.

How Deceptively Low Rates Cost You More

Here’s a simple example. Your company is looking for a $150,000 loan with a one year term. $75,000 is to be used toward the initial purchase of the property and there will then be three subsequent $25,000 construction draws at months 5, 6, and 7.

With a full boat loan at the “low” rate of 6.95%, you’ll pay interest against the $150k from day one for the full 12 months. However, with an “as disbursed” loan at the higher rate of 7.95%, you pay interest only against the money you’ve actually received. Here’s a closer look at the math:

When 7.95 is lower than 6.95

In the example chart, a “lower” rate full boat loan actually results in you paying close to $1,000 more in interest vs. an as disbursed loan. Haus Lending charges interest as disbursed.

Unfortunately, charging full boat interest is a common practice that lenders use: they advertise loans at low rates that appear to be better deals, but because you pay interest on the total amount right away, you end up paying more in the long run.

Don't Just Shop for a Rate – Make Sure the Interest is calculated and charged “As Disbursed”

Finding construction loans that promise low rates is easy, but protecting yourself by assessing how they can cost you a lot more in the end requires looking beyond the advertised numbers.

Haus Lending helps investors find transparent and fair loans for fix and flip, multifamily, and rentals.

If you want to learn more about how we can save you money versus deceptive “low rate” offers, connect with the Haus Lending team at hello@hauslending.com and let’s talk about your project.

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