What Is an Interest-Only Loan?
An interest-only (IO) loan allows you to pay only the interest portion of the mortgage for a set period — typically 5 to 10 years. During the IO period, your monthly payment is significantly lower because you are not paying down principal. After the IO period ends, the loan converts to a fully amortizing payment for the remaining term.
For investors, interest-only payments can dramatically improve cash flow. A $500K loan at 7.5% has a fully amortizing payment of approximately $3,496/month vs. an IO payment of $3,125/month — $371/month back in your pocket per property.
The strategy: Most investors using IO loans plan to refinance, sell, or pay down principal before the IO period ends. The goal is maximum cash flow during the hold period. This is a leverage play.
Who Interest-Only Loans Are For
- Buy-and-hold investors focused on cash flow optimization
- Portfolio builders who want maximum leverage
- DSCR borrowers — IO payments improve DSCR ratios
- Short-to-medium term holders planning to sell or refinance within 5-10 years
Key Features
IO periods of 5, 7, or 10 years. Available on DSCR loans, bank statement loans, jumbo loans, and some conventional products. Credit scores from 680+. LTV up to 75-80%. After IO period, the loan fully amortizes over the remaining term. Prepayment penalties may apply on DSCR/non-QM versions.