Rate is the number every investor compares and close to the least important input in the total cost of a twelve month flip. We have watched borrowers chase half a point of rate into a six week close and lose the property. We have watched borrowers price two loans as though the interest runs on the full balance from day one, which it usually does not. Here is what actually moves the number.
What You Are Actually Paying For
There are four real costs on a short-term renovation loan: origination, interest, time, and the cost of not closing. Trato's Fix & Flip program prices from 9.00%, subject to underwriting, with origination from 1.50% on a 12-month term. Those are the inputs. What you pay depends on how you use them.
Origination is charged once, up front, on the loan amount. Interest accrues over however long you hold. Time multiplies everything. And the fourth cost, the deal you do not get, does not appear on any term sheet, which is exactly why investors ignore it.
Points Are Front-Loaded and Rate Is Not
A point is paid at closing on the full loan amount regardless of how long you hold. Interest is paid over time on what you have actually drawn. That asymmetry matters enormously on a short hold and barely matters on a long one.
Illustrative only: on a $400,000 loan, one point is $4,000 paid at closing. One percentage point of rate on that same balance is about $4,000 over a full year, or about $2,000 if you exit in six months. So a lender charging one extra point but one point less in rate is more expensive on a fast flip and cheaper on a slow one. Most investors have this backwards because points feel like a fee and rate feels like the cost.
Look at the two together against your actual expected hold, not against a twelve month assumption you do not intend to use.
Interest on Drawn Balance Versus Full Balance
This is the question we get asked least and it changes the math the most. On a purchase plus rehab structure, the purchase advance funds at closing and the rehab money sits in a holdback. If interest accrues only on what has been disbursed, your carrying cost starts small and grows as the project progresses. If it accrues on the full committed amount, you are paying for money you have not touched.
Illustrative only: $100,000 of rehab held back and released in four draws over six months. Interest on the drawn balance means you pay on an average balance well under $100,000 across that period. Interest on the full commitment means you pay on $100,000 from day one. At a ten percent rate that difference is several thousand dollars on one project.
Ask the question in exactly these words: does interest accrue on the disbursed balance or the committed balance? A vague answer is an answer.
Draw Timing Is a Cash Cost, Not Just a Schedule
Draws reimburse completed work. You pay the crew, an inspector verifies, funds release. The gap between paying and getting reimbursed is real working capital you have to carry, and if the inspection takes ten days instead of three, you carry it longer.
The cost shows up in two places. You need cash on hand to keep the job moving, and delays between draws stretch the schedule, which stretches interest. A lender with slow draws is more expensive than their rate suggests, and nobody puts draw turnaround on a term sheet.
Ask how draws are requested, who inspects, and how long funding takes after approval. Then plan your own cash around the honest answer rather than the optimistic one.
How Long You Actually Hold It
Most flip pro formas assume a six month hold. Most flips do not take six months. Permits, weather, a subcontractor who disappears, a market where properties sit for sixty days instead of fifteen. Every month past the plan is another month of interest, taxes, insurance, and utilities.
Illustrative only: a $400,000 loan at ten percent costs roughly $3,300 a month in interest. Three months of overrun is about $10,000 before you count taxes, insurance, and utilities. On a deal underwritten to a $60,000 profit, that overrun is a sixth of your margin.
Extensions add to it. Extension fees are normal and reasonable, but they are a cost you can forecast and most people do not. Underwrite your own deal to a hold one third longer than you expect. If it still works, you have a real deal.
The Cost of a Slow Closing
This is the position we will defend hardest. A cheaper loan that closes in six weeks can cost more than a more expensive loan that closes in ten days, because the difference is not measured in basis points. It is measured in whether you own the property.
Illustrative only: two structures on the same $400,000 deal, one priced a full point cheaper in rate. Over a six month hold that is roughly $2,000 of savings. Now suppose the cheaper option takes six weeks and the seller, who wanted a fast close, takes a backup offer. The savings are $2,000 and the loss is the entire projected profit on the deal.
Speed also buys you negotiating room. A seller who believes you will close will often take less than a seller who has been told to wait. That discount frequently exceeds the entire interest cost of the loan.
None of this means overpay. It means price the loan against the deal you are trying to win, not against a spreadsheet with no clock in it.
A Better Way to Compare
Build one number: total dollars paid to the lender from closing through payoff, at your realistic hold, including origination, interest on the balance you will actually draw, and one extension. Then put a line next to it for how fast each option can close and what that speed is worth on this specific property.
Do that and the comparison stops being about rate. It starts being about the deal.