DSCR Loan Interest-Only Period: How It Works

On an interest-only DSCR loan, your payment during the IO period covers interest only; none of it reduces principal. Example: a $400,000 loan at 7%. The interest-only payment is $2,333/month ($400,000 × 7% ÷ 12). A 30-year fully amortizing payment on the same loan is $2,661/month (principal and interest), so IO saves about $328/month at first. The catch comes later. With a 10-year IO period, the full $400,000 is still owed in year 11 and must be repaid over the remaining 20 years—$3,101/month, a 33% jump from the IO payment and 17% more than the fully amortizing payment would have been all along. Taxes, insurance and any HOA dues come on top of each figure. Over the life of the loan, the IO structure costs roughly $66,000 more in interest in this example.

DSCR divides the property's rent by its monthly debt payment (principal, interest, taxes, insurance and HOA). Because the IO payment is smaller, many lenders that offer IO calculate DSCR on the interest-only payment, which makes the ratio look stronger; more conservative lenders qualify on the fully amortizing payment instead. Example: rent of $3,800/month with $500 of taxes and insurance. On the IO payment ($2,833 total), DSCR is 1.34. On the fully amortizing payment ($3,161), it's 1.20. When a 10-year IO period ends ($3,601), the same rent produces a DSCR of just 1.06 unless rents have grown. That's the risk: IO can qualify a property that barely covers a real, amortizing payment.

Interest-only can fit some strategies. It maximizes early cash flow, which can help an investor who plans to sell or refinance before the IO period ends, or who wants every dollar of cash flow for the next acquisition. The costs are real, though: no principal paydown, so your equity grows only if the property appreciates; a payment increase when the IO period ends; more total interest; and, at many lenders, a higher rate or lower maximum LTV than a comparable amortizing loan. If values fall or rents soften, an IO borrower has less equity cushion to refinance or sell. Interest-only is most common—and makes the most sense—on short-term financing such as bridge or fix-and-flip loans, where the balance is repaid within months.

LYNK Mortgage's DSCR rental loans are 30-year fixed-rate and fully amortizing—there is no interest-only period and no adjustable-rate option. For long-term holds, that structure does three things. It builds equity: in the $400,000 example, about $56,750 of principal is paid down over the first 10 years, versus nothing on an IO loan. It keeps payments stable: principal and interest stay the same for all 30 years, so the payment you underwrite at closing is the payment you make in year 11 and year 25. And it removes payment shock: there's no reset date to plan around or refinance ahead of. Rates start at 7.00%, loans go up to 80% LTV, qualification is based on the property's rental income with no tax returns, and you'll need at least 3 months of reserves.