Interest-Only vs Amortizing Calculator

What is an interest-only DSCR loan?

An interest-only (I/O) DSCR loan means you pay only the interest portion of the mortgage for an initial period — typically 10 years — with no principal reduction. The monthly payment is lower than a fully amortizing loan on the same balance. After the I/O period ends, the loan converts to fully amortizing on the remaining term.

The appeal is straightforward: lower monthly payment = higher DSCR = better lender terms = stronger cash flow position during the hold period. The cost is that you build no equity through amortization and pay more total interest over the life of the loan.

The payment math

On a $350,000 loan at 7.25%:

• I/O monthly payment: $350,000 × 0.0725 / 12 = $2,114
• Amortizing 30-year payment: $2,388
• Difference: $274/month, or $3,288/year during the I/O period

If monthly rent is $3,200 and TIHA is $700, the DSCR comparison is:

• I/O DSCR: $3,200 / ($2,114 + $700) = $3,200 / $2,814 = 1.14
• Amortizing DSCR: $3,200 / ($2,388 + $700) = $3,200 / $3,088 = 1.04

Both are in the 1.00–1.24 tier, but on a tighter deal where rent is $2,900, I/O might cross the 1.00 threshold while amortizing doesn't. That's the tier boundary that matters on tight deals.

Total interest: the real cost of I/O

The interest-only structure trades lower monthly payments for higher lifetime interest. Over the full 30-year life of the loan, an I/O loan with a 10-year I/O period generates approximately $48,000–$62,000 more total interest than a standard 30-year amortizing loan on the same balance and rate.

However, this number is largely irrelevant for the majority of DSCR investors who have a 5–10 year exit horizon. For a 7-year hold, the relevant comparison is:

1. Cumulative interest paid through year 7 (slightly more with I/O vs amortizing in early years)
2. Property appreciation during that period (same either way)
3. Cash flow differential (higher with I/O — the $274/month adds up)
4. Equity position at sale (lower with I/O — no principal paid down)

Run both scenarios explicitly with your actual hold assumption, not the full 30-year horizon.

The DSCR threshold strategy

Interest-only is most powerful as a DSCR threshold strategy — when a deal would fall into the 0.75–0.99 tier on a fully amortizing basis but clears 1.00 on I/O. The pricing improvement from crossing the 1.00 threshold can be:

• Rate add-on reduction: typically +0.25 to +0.375% drops off
• LTV improvement: from 70–75% cap to 75–80% access
• Lender pool: from limited to mainstream lenders

These secondary benefits compound across the full term of the loan and are often worth more than the simple payment math suggests.

When I/O is the right call

Interest-only makes sense in three specific scenarios:

1. Tight DSCR at amortizing payment. The deal qualifies at I/O DSCR but not at amortizing. Without I/O, the deal doesn't close or closes with worse terms.
2. Capital recycling strategy. You plan to deploy the $274/month savings into additional acquisitions and exit before the I/O period ends. The opportunity cost of the capital exceeds the equity-building benefit.
3. High-appreciation markets. In a market where you're buying for appreciation rather than cash flow, I/O maximizes monthly cash flow and maximizes your eventual sale proceeds relative to debt service paid.

Next steps

• Check whether your deal qualifies with the DSCR Calculator.
• See amortization details with the Amortization Schedule calculator.
• Get I/O quotes from lenders who offer interest-only DSCR programs.