Interest-only (IO) loans are available on most private lending products — DSCR loans, bridge loans, and some construction products. They generate strong short-term cash flow and improve debt service coverage ratios. They also mean you're not building equity through amortization, which matters depending on your hold strategy.
How IO Improves DSCR
On a $400K loan at 6.5% for 30 years, the P&I payment is $2,528/month. The IO payment is $2,167/month. That $361/month difference improves your DSCR from 1.05 to 1.22 on $2,650/month rent. In marginal DSCR scenarios, IO can be the difference between qualifying and not qualifying.
IO Periods
Most DSCR loans offer 3, 5, or 10-year IO periods before converting to fully amortizing. After the IO period, the payment jumps as you're now paying P&I on the same balance you had at origination. Model this payment shock into your projections — especially if you plan to hold long-term.
Who Should Use IO Loans
IO makes sense for investors who plan to sell before the amortization period starts, investors who prioritize cash flow over equity build, and value-add investors who plan to refinance after improvements raise the value. IO does not make sense for investors seeking long-term equity accumulation without a secondary appreciation strategy.
IO and Tax Strategy
Interest is fully deductible on rental property. An IO loan maximizes your deductible interest in the early years of a loan — relevant for investors in high tax brackets. Consult your CPA on how IO structures interact with your overall depreciation and interest deduction strategy.
