Some private lenders use a method of interest accrual known as “Dutch interest” for a hard money construction loan which calculates payments based upon the entire loan amount rather than payments on partial advancements in a construction loan.

First Capital Trust Deeds works with a few hard money lenders in California, Oregon, Washington, and Florida that use Dutch interest. Most construction focused loans originated by FCTD, however, feature “New York interest”, where interest accrues on construction reimbursement advances rather than on the entire loan.

Below are two comparisons between Dutch and New York interest on hard money fix and flip + rehab loans. In this example, we use a $500,000 purchase price with $100,000 rehab budget on an “80/100 Fix and Flip Loan” (80% LTV on the purchase and 100% rehab reimbursement):

Dutch Interest

$500,000Purchase Price
$400,00080% Purchase
$100,000100% Rehab Reimbursement
$500,000Total Loan Amount
9.00%Interest-Only
$3,750/moFirst Payment

New York Interest

$500,000Purchase Price
$400,00080% Purchase
$100,000100% Rehab Reimbursement
$500,000Total Loan Amount
9.00%Interest-Only
$3,000/moFirst Payment
+$187/moFirst Payment - $25,000 Rehab Reimbursement Advance
$3,187Total First Payment

For very quick rehab or renovation periods of 1-2 months, using a hard money lender that utilizes Dutch interest on a fix and flip loan may be advantageous. If a project is expected to take 6-12 months, it’s recommended that a real estate investor utilize financing from a hard money lender using New York interest. The cost savings using New York interest could be significant and lead to greater profits for a real estate investor.

Interested in private money financing and hard money lending?