Quick Answer
Interest-only DSCR loans reduce monthly payments by 20-35% during the IO period (typically 5-10 years), improving DSCR ratios and increasing maximum loan amounts by 10-15%. However, payments jump 30-50% when the loan amortizes, and you build no equity during the IO period. Use interest-only for short-term holds, value-add strategies, or maximizing cash flow during lease-up.
Key Takeaways
- IO payment reduction: 7.5% rate on $300K loan drops from $2,098 P&I to $1,875 IO (11% savings)
- DSCR improvement: Lower payment increases DSCR, potentially qualifying for larger loans
- Payment shock at amortization: Payments jump 30-50% when IO period ends
- Best for short-term holds (5-7 years): Sell or refinance before amortization begins
- No equity buildup during IO period: Rely on appreciation, not principal paydown
FAQ
Q: How long do interest-only periods last? A: Typically 5–10 years. After that, payments convert to fully amortizing, increasing your monthly payment significantly.
Q: Is interest-only riskier for my exit strategy? A: Yes. You build no equity during the IO period. Plan for higher payments or refinancing before the IO term expires.
Q: Do all DSCR lenders offer interest-only? A: No. Many require 1.25+ DSCR for IO versus 1.0–1.15 for amortizing loans. Expect 0.125–0.25% rate premiums.
Next Step
Use the DSCR Calculator to compare your IO payment versus fully amortizing scenarios side by side.