Interest-Only Loan

On an interest-only loan, each payment covers just the interest for some period, so the balance stays where it started. Most hard money and bridge loans on the buy step of BRRRR are interest-only, and some long-term investment loans offer an interest-only period to lift cash flow after the refinance.

On the default deal, the $270,000 short-term loan at 11% costs $2,475 a month in interest, or $14,850 over a six-month hold. Because nothing is amortized, the full $270,000 is still owed when the refinance pays it off.

Applied to the default refinance, interest alone on $375,000 at 7.25% comes to about $2,266 a month. That is roughly $293 less than the amortizing payment of $2,558, and the difference stays in the investor's pocket. The balance does not fall during that period, though, and when it ends the payment jumps because the principal is repaid over fewer years.

Further reading: Interest-Only Loan on Wikipedia.