Interest-only is the most powerful lever on a DSCR loan and the least understood. It can rescue a deal that doesn't qualify. It can also leave you holding the same balance in ten years that you started with.
Both are true. Which one you get depends on the deal.
What IO actually does to the ratio
DSCR is rent divided by PITIA. Interest-only removes the principal component of the payment, so the denominator shrinks and the ratio rises.
$400,000 at 8.25%:
| Amortizing (30yr) | Interest-only | |
|---|---|---|
| Principal + interest | $3,005 | $2,750 |
| Taxes | $420 | $420 |
| Insurance | $165 | $165 |
| PITIA | $3,590 | $3,335 |
| Rent | $3,950 | $3,950 |
| DSCR | 1.10x | 1.18x |
Same property, same loan, same rate. 0.08x of coverage from structure alone.
At lower rates the effect is larger, because principal makes up a bigger share of an amortizing payment. At 6.5%, the same $400,000 loan shows roughly 0.13x of improvement. At 10%, closer to 0.05x. IO helps most exactly when you'd least expect it — in lower-rate environments.
The 0.94x → 1.18x claim
The headline case: a property where amortizing coverage lands at 0.94x, below almost every lender's floor.
Layering IO on top of a modest LTV reduction gets you there:
| Structure | Loan | PITIA | DSCR |
|---|---|---|---|
| Amortizing, 80% LTV | $440,000 | $3,905 | 0.94x |
| IO, 80% LTV | $440,000 | $3,610 | 1.02x |
| IO, 72% LTV | $396,000 | $3,335 | 1.10x |
| IO, 72% LTV, taxes appealed | $396,000 | $3,155 | 1.18x |
IO alone didn't do it. IO plus leverage discipline plus a property tax appeal did. That's usually the real shape of it — IO is one of three or four levers, not a magic switch.
What IO costs you
A rate premium. Typically 0.125% to 0.375% depending on the lender and the IO term. On $400,000, roughly $500–$1,500 a year.
Zero amortization. This is the real cost, and it's larger than the rate premium by an order of magnitude.
$400,000 at 8.25%, over a 10-year IO period:
- Amortizing: balance after 10 years ≈ $353,000. You've retired about $47,000 of principal.
- Interest-only: balance after 10 years = $400,000. You've retired nothing.
That $47,000 is real equity you didn't build. Against it, you kept $255/month — about $30,600 over ten years — in cash flow. So on paper the amortizing loan is roughly $16,000 ahead over that decade, assuming you did nothing with the extra cash.
And that assumption is the whole argument. If you deployed $255/month into another down payment, IO wins comfortably. If it went into your checking account, amortizing wins.
Payment shock at recast. When the IO period ends, the loan amortizes over the remaining term. A 10-year IO on a 30-year loan amortizes the full balance over 20 years, not 30. That payment is materially higher than a straight 30-year payment would have been — roughly $3,410 vs $3,005 in our example. Know your recast date and plan for it.
When IO is the right call
1. Stabilizing property. Rents are below market and you're renovating or repositioning. IO carries you through the low-income period; you refinance or recast once rents are where they should be.
2. You're actively acquiring. Every dollar of cash flow is going into the next down payment. Amortizing on the old portfolio is paying down debt instead of buying assets — that's a choice, and if you're in growth mode it's the wrong one.
3. Defined short hold. You'll sell or refinance in three to five years. Amortization over that window is trivial anyway, and you keep the monthly cash.
4. The deal doesn't qualify otherwise, and it's genuinely a good deal. If IO is the difference between closing and not closing on a property that will produce real returns, take IO. Just be honest about the "genuinely good deal" part.
When IO is wrong
1. You're using it to qualify for a deal that doesn't work. If the property needs IO to clear 1.00x, you have a thin deal with no margin for a vacancy, a roof, or an insurance increase. IO didn't make it safer — it made it financeable, which is different.
2. You're building toward a free-and-clear portfolio. If the plan is to own these outright in twenty years, amortization is the plan. Don't switch it off.
3. You won't deploy the extra cash flow. IO only beats amortizing if the difference goes to work. Be honest about whether it will.
The model, in five lines
- Compute DSCR both ways. If amortizing clears comfortably, IO is optional.
- Price both. Note the rate premium in dollars per year.
- Compute principal you'd retire over your realistic hold.
- Compute the extra cash flow over the same period, and be specific about where it goes.
- If (3) exceeds (4) and you can't name what (4) buys you, take the amortizing loan.
Most operators who ask about IO have already decided they want it. The question worth sitting with is whether they want it because it makes the portfolio grow faster, or because it makes a marginal deal look like a good one.
No W2