Short version: the rate on your fix and flip term sheet is an annual number, but you never pay a year of interest on a flip. You pay by the day. How the lender converts that annual rate into a daily charge, whether they use a 30/360 convention or actual days over 365, and whether interest accrues on your full loan amount or only on money you have actually drawn, are the three things that decide what shows up on your monthly statement and what you owe on the payoff. Two loans quoted at the same rate can cost meaningfully different money once those conventions are applied.
We are a Pittsburgh-based mortgage brokerage, NMLS #1840537, and we place fix and flip and bridge loans for real estate investors across Pennsylvania and additional states. The question we field most often after a term sheet goes out is some version of “why is my payment not what I calculated.” The answer is almost always a day-count convention, a partial first month, or interest accruing on undrawn rehab money. Here is how the arithmetic actually works, so you can price a deal correctly and read a payoff statement without guessing.
Flip loans charge interest by the day, not by the year
A fix and flip loan is short. Most run six, twelve, or eighteen months, and plenty pay off early when the property sells. Because the term is short and unpredictable, lenders do not amortize the loan the way a thirty-year mortgage amortizes. They charge simple interest on the outstanding balance, calculated daily, and they bill you monthly for the days that elapsed.
That means the number that actually matters to you is the per diem, the dollar amount of interest that accrues every single day the loan is outstanding. Everything else on the statement is derived from it. If you know your per diem, you can price a two-week extension, you can decide whether it is worth pushing a closing from the thirtieth to the first, and you can sanity-check a payoff quote before you wire.
The per diem is your outstanding principal times your annual rate, divided by the number of days the lender uses in a year. That divisor is the first place two loans quoted at the same rate stop being the same loan.
30/360 versus actual/365
There are two common day-count conventions in this space.
Actual over 365. The lender divides your annual rate by 365 to get a daily rate, then charges you for the actual number of days in each month. February bills 28 days. March bills 31. Over a full year you pay exactly the stated rate, and the monthly bill fluctuates with the calendar.
30/360. The lender treats every month as 30 days and every year as 360 days. Your monthly interest is identical every month, which makes budgeting simple. The catch is arithmetic: dividing by 360 instead of 365 produces a slightly larger daily rate, and over a full year you pay a little more than the stated rate suggests.
Run the numbers on a real balance. Take a loan amount of three hundred thousand dollars at ten and a half percent.
Under actual over 365, the daily accrual is three hundred thousand times point one zero five, divided by 365, which is about eighty-six dollars and thirty cents per day. A 31 day month bills roughly two thousand six hundred seventy-five dollars.
Under 30/360, the daily accrual is three hundred thousand times point one zero five, divided by 360, which is about eighty-seven dollars and fifty cents per day. Every month bills exactly two thousand six hundred twenty-five dollars, because every month is treated as 30 days.
On any individual 31 day month, actual over 365 bills more. But over a full calendar year, 30/360 bills twelve payments of two thousand six hundred twenty-five dollars, or thirty-one thousand five hundred dollars, while actual over 365 bills thirty-one thousand five hundred dollars as well on a non-leap year. The convention matters less over a full year than it does over a partial one, and flips are almost always partial. On a five month hold that ends mid-month, the two conventions can differ by a few hundred dollars. That is not a reason to pick one lender over another by itself, but it is a reason to know which one you signed.
The partial first month at closing
This is the single most common surprise, and it is not a fee, it is just the calendar.
Most flip loans bill interest in arrears on the first of the month. If you close on the eighteenth, your loan is outstanding for the remaining days of that month before the first billing cycle starts. Lenders handle this one of two ways. Some collect the prepaid interest for those days at the closing table, which is why your settlement statement shows an interest line item you did not budget for. Others let it ride and roll it into your first invoice, which arrives larger than every invoice after it.
On that same three hundred thousand dollar loan at eighty-six dollars and thirty cents per day, closing on the eighteenth of a 31 day month means thirteen days of accrual, or about one thousand one hundred twenty-two dollars, either due at closing or added to the first bill. It is not extra money in the sense of a charge you avoided. It is interest for days you had the money. But it belongs in your cash-to-close estimate, and it frequently is not. Our full walkthrough of fix and flip closing costs covers where this line sits relative to origination, title, and the rest.
Interest on the full loan versus interest on what you drew
The third variable is the biggest one, and it dwarfs the day-count question on a rehab-heavy deal.
A fix and flip loan usually has two pieces: money funded at closing to buy the property, and a rehab holdback the lender releases in draws as work gets completed. The question is whether interest accrues on the entire approved loan amount from day one, or only on the balance you have actually drawn.
Accruing on the full amount from day one is what the industry calls Dutch interest. Accruing only on drawn funds is non-Dutch. On a deal with a large rehab budget the difference is real money, because the rehab holdback can sit undrawn for months while you permit, demo, and wait on a contractor. We break the mechanics and the cost comparison down in detail in our guide to Dutch versus non-Dutch interest on fix and flip loans, and if you are comparing two term sheets it is the first thing to check after the rate itself.
Here is the short version applied to per diem. Say your purchase piece is two hundred thousand dollars and your rehab holdback is one hundred thousand dollars, at ten and a half percent on actual over 365. Under non-Dutch, your per diem on day one is about fifty-seven dollars and fifty-three cents, and it climbs as you draw. Under Dutch, your per diem on day one is about eighty-six dollars and thirty cents and it never moves. If the rehab money averages half drawn across a six month hold, Dutch interest costs you roughly two thousand six hundred dollars more on that deal. Same rate. Same lender. Different convention.
Interest reserves are not the same thing
Investors sometimes assume an interest reserve means they are not paying interest. It does not. An interest reserve is money the lender sets aside out of your loan proceeds to make your monthly interest payments for you during the rehab, so you are not writing a check every month on a property that produces no income. You are still borrowing that money, and you still owe it back at payoff, with interest accruing on it depending on how the reserve is structured.
Reserves are genuinely useful on a deal with a long rehab and thin monthly cash flow, and they keep you from having to service a payment out of pocket. But they are a cash flow tool, not a discount. Our post on interest reserves on fix and flip loans covers how lenders size them and what happens if the reserve runs dry before the project sells.
Reading the payoff statement
When your flip goes under contract and title orders the payoff, the number that comes back has four pieces: outstanding principal, accrued unpaid interest through the payoff date, any exit or extension fees, and per diem beyond the quoted date.
That last line is the one to read carefully. A payoff quote is good through a specific date. If your closing slips, title has to add per diem for every additional day, and if they do not, you will be short at the wire and the closing stalls. Ask title to build in a few days of cushion. Overage comes back to you.
Also check whether your loan carries a minimum interest provision. Some short-term loans guarantee the lender a set number of months of interest regardless of when you pay off. Sell in month three on a loan with a six month minimum and you owe six months of interest anyway. That provision lives in the term sheet and in the note, and it is easy to skim past. Our guide to reading a fix and flip loan term sheet flags where to look.
Working per diem into your deal analysis
Most flippers underwrite financing cost as a single lump estimate and move on. Do it by the day instead, because it makes every timeline decision quantifiable.
Take the same three hundred thousand dollar loan at eighty-six dollars and thirty cents per day. A contractor who runs three weeks long costs you about one thousand eight hundred twelve dollars in interest alone, before any extension fee. A permit that sits for six weeks costs about three thousand six hundred twenty-five dollars. A buyer who asks for a two week extension on a closing costs about one thousand two hundred eight dollars, which tells you exactly what a concession to keep that buyer is worth.
Once you are pricing time in dollars, the decisions get easier. Paying a contractor a premium to finish two weeks earlier stops being an emotional call and becomes arithmetic. So does deciding whether to accept a slightly lower offer that closes in two weeks instead of a higher one that closes in six.
You can model the financing cost against your purchase price, rehab budget, and after-repair value in our deal calculator before you commit to a timeline.
What to ask before you sign
Five questions settle almost everything covered here, and all five have short answers your loan officer should give without hesitating.
What day-count convention is this, 30/360 or actual over 365. Does interest accrue on the full loan amount or only on drawn funds. Is prepaid interest collected at closing or added to the first invoice. Is there a minimum interest period or a prepayment penalty. And what is the per diem at initial funding, in dollars.
Get those five in writing and you can price the deal accurately, compare two term sheets on equal footing, and read your payoff without a phone call.
How we approach it
As a brokerage we place these loans with multiple capital sources, which means we see the conventions side by side across a lot of term sheets. On a purchase-heavy deal with a small rehab, the day-count convention is usually the thing worth optimizing. On a rehab-heavy deal where the holdback is a third or more of the loan, whether interest accrues on undrawn money almost always matters more than a quarter point on the rate. We would rather put you in a slightly higher rate that only charges you on drawn funds than a headline rate that bills you on money sitting in a holdback account.
Terms, rates, day-count conventions, and reserve requirements vary by capital source, by borrower experience, and by deal, and they are subject to change. Nothing here is a commitment to lend or a quote. It is how the mechanics work so you can ask better questions.
If you have a flip under contract and you want a term sheet read line by line before you sign it, get in touch or call us at 412-990-2941. You can also look at our fix and flip and bridge loan products to see the structures we work with.
FMC Capital, NMLS #1840537. This article is general information for real estate investors and is not a loan commitment, a rate quote, or financial advice. Loan terms, pricing, and requirements vary by lender, property, and borrower, and are subject to change.