A good fit if
- You want the highest monthly cash flow
- A rental is just short of 1.0x DSCR
- You plan to sell or refinance within the interest-only period
Probably not if
- You want to build equity through payments
- You can't afford the higher payment later
- You need the lowest possible rate
How Interest-Only Loans Work
During the interest-only period, often the first 10 years, your payment covers interest only. Your loan balance doesn't go down. After that, the loan converts to a fully amortizing payment over the remaining term, so the payment goes up.
Example: on a $400,000 loan at 7%, a 30-year amortizing payment is about $2,661 a month. The interest-only payment is about $2,333, roughly $328 less each month. This is an illustration only, not a quote.
Interest-Only and DSCR
On a DSCR loan, many lenders calculate the ratio using the interest-only payment. That lower payment can lift a property from just under 1.0x to over it.
Example: rent is $3,000. With taxes, insurance, and HOA of $600, the amortizing payment totals $3,261 (0.92x). On interest-only, it's $2,933, so the DSCR is 1.02x. Some lenders still qualify on the amortizing payment, so ask before you count on it.
Read more about this strategy in interest-only DSCR loans.
Interest-Only Loan Requirements
- Credit: often from 640–680, depending on the program.
- Loan size: some lenders require $250,000 or more for interest-only.
- Max LTV: sometimes 5% lower than the amortizing version.
- Reserves: often more than on an amortizing loan.
- First-time homebuyers: interest-only is often not available.
- Terms: 30-year with 10 years interest-only, or 40-year with 10 years interest-only, at many lenders.
Why Investors Use It
- Higher DSCR. Many lenders qualify on the interest-only payment, so the same rent covers more.
- Cash flow now. Money that would go to principal stays available for repairs, reserves, or the next deal.
- Short holds. If you'll sell or refinance within the period, paying down principal may matter less to you.
The Tradeoffs
- Interest-only usually adds to the rate.
- You don't build equity through payments, only through appreciation or paying extra.
- The payment rises when the interest-only period ends, which you need to plan for.
Interest-Only vs. 40-Year Amortizing
| Interest-only | 40-year amortizing | |
|---|---|---|
| Early payment | Lowest | Lower than 30-year |
| Principal paydown | None during the IO period | Slow but steady |
| Payment change later | Yes, after the IO period | No |
| Best for | Maximizing DSCR and cash flow | Lower payment without a reset |
How to Qualify
- Confirm the loan amount meets the lender's interest-only minimum.
- Run the property in the DSCR calculator with the interest-only box checked.
- Plan for the higher payment after the interest-only period ends.
- Send me the scenario, and I'll price interest-only and amortizing side by side.
Documents You'll Need
The same as the underlying program. For DSCR: ID, asset statements, the lease, insurance, and entity documents. For bank statement or jumbo loans on a home you live in: the income documents for that program.
Interest-Only FAQ
Do lenders use the interest-only payment to calculate DSCR?
Many do, which can raise your ratio. Some qualify on the fully amortizing payment instead, so check before you rely on it.
How long is the interest-only period?
Usually 10 years, and 5 years at some lenders, on a 30- or 40-year loan.
Can I pay extra principal during the interest-only period?
Usually, yes. Check the prepayment penalty terms on investment loans before making large extra payments.
What happens when the interest-only period ends?
The loan starts amortizing over the remaining term, so the payment rises. Many investors refinance or sell before then.
Is interest-only available on a home I live in?
Some Non-QM and jumbo programs offer it on primary residences. It's less common and requires careful planning for the payment change.
Business-purpose loans for investment properties in California and other states where permitted. Interest-only payments do not reduce your loan balance. After the interest-only period, the payment increases to repay principal over the remaining term. Terms vary by lender and are not a commitment to lend.