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Interest-Only
A loan payment structure where you pay only interest for an initial period, with no principal reduction.
Definition
An interest-only loan allows the borrower to pay only the interest portion for a set period, typically 5 to 10 years, before the loan converts to fully amortizing payments. Monthly payments during the interest-only period are significantly lower, which boosts cash flow and improves the DSCR. However, no equity is built during this period, and payments increase substantially once amortization begins. Interest-only periods are popular with investors who plan to sell or refinance before the amortization period starts. The trade-off is higher total interest paid if the loan is held to maturity.
How This Relates to DSCR Loans
Many DSCR lenders offer interest-only options for the first 5-10 years. This lowers your PITIA and can push a borderline DSCR above the qualifying threshold.
Related Terms
Amortization
The process of paying off a loan through scheduled payments that cover both principal and interest over time.
Cash Flow
The net money remaining after all income is collected and all expenses and debt payments are made.
DSCR (Debt Service Coverage Ratio)
A ratio that measures whether a property's rental income covers its debt payments.
ARM (Adjustable Rate Mortgage)
A mortgage with an interest rate that adjusts periodically based on a market index after an initial fixed period.
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