Understanding Interest-Only (365/360) in Real Estate Lending

When reviewing a loan quote or term sheet, you may come across the phrase “interest-only (365/360)”. While it may seem like a minor technical detail, this calculation method can have a meaningful impact on your actual borrowing cost—especially in short-term or bridge loans.

This article breaks down what interest-only (365/360) means, how it works, and why it matters for real estate investors.

What Does “Interest-Only” Mean?

An interest-only loan is exactly what it sounds like: during the loan term, the borrower pays only the interest accrued on the loan, without paying down the principal balance.

• Loan balance remains unchanged during the term
• Monthly payments are lower compared to amortizing loans
• Common in bridge loans, construction loans, and short-term financing

At the end of the term, the full principal is typically due as a balloon payment, or the borrower refinances or sells the asset.

What Does “365/360” Mean?

The 365/360 refers to how interest is calculated:

• 365 = the actual number of days in a year (used to calculate daily interest)
• 360 = the number of days the lender uses to determine the annual rate

How It Works

The lender:

1. Takes your annual interest rate
2. Divides it by 360 days to get a daily rate
3. Multiplies that daily rate by the actual number of days (365) in the year

This results in a slightly higher effective interest rate than what’s quoted.

Why Lenders Use 365/360

From a lender’s perspective, the 365/360 method:

• Standardizes calculations across loans
• Slightly increases yield without changing the quoted rate
• Is widely accepted in commercial and private lending

For borrowers, it’s important to understand that this structure increases the true cost of capital.

Simple Example

Scenario:

• Loan Amount: $1,000,000
• Interest Rate: 12%
• Structure: Interest-only (365/360)

Step 1: Daily Rate

12% ÷ 360 = 0.03333% per day

Step 2: Annual Interest Paid

0.03333% × 365 days = 12.17% effective annual rate

Result:

Instead of paying exactly $120,000 per year (12%), you’re effectively paying about $121,667.

Monthly Payment Example

Using the same loan:

• Daily interest: $1,000,000 × (12% ÷ 360) = $333.33/day
• Monthly payment (30-day month):
  $333.33 × 30 = $10,000
• Monthly payment (31-day month):
  $333.33 × 31 = $10,333

Key Takeaway:

Your payment varies slightly each month depending on the number of days.

Real-World Investor Scenario

Let’s say you take out a 6-month bridge loan:

• Loan Amount: $2,000,000
• Rate: 11% interest-only (365/360)
• Hold Period: 180 days

Interest Calculation:

• Daily rate: 11% ÷ 360 = 0.03056%
• Daily interest: ~$611.11
• Total interest (180 days): ~$110,000

If the loan were calculated on a true 365-day basis, the total interest would be slightly lower—meaning the 365/360 structure adds incremental cost.

Why This Matters for Investors

For real estate investors, especially those using short-term debt:

1. Impacts Deal Profitability

That small difference in interest can affect your:

• Net proceeds
• Cash-on-cash return
• Flip or refinance margins

2. Important for Short-Term Loans

The shorter the loan term, the more noticeable the impact:

• Bridge loans
• Fix-and-flip financing
• Transactional funding

3. Not Always Clearly Understood

Many borrowers focus only on the headline interest rate, not realizing the calculation method increases the effective rate.

How to Evaluate a Loan with 365/360

When reviewing financing options:

• Ask for the effective annual rate, not just the note rate
• Model out actual dollar interest, not just percentages
• Compare against alternative structures (e.g., 30/360 or true 365)
• Factor in holding period, not just annualized cost

Final Thoughts

“Interest-only (365/360)” is a standard structure in private and commercial real estate lending—but it’s not just technical jargon. It directly affects how much you pay.

While the difference may seem small on paper, it adds up quickly on larger loan amounts and shorter timelines.

As an investor, understanding these nuances allows you to:

• More accurately underwrite deals
• Compare loan options effectively
• Protect your margins

If you’re evaluating financing, always look beyond the rate—and into how that rate is actually calculated.