Interest-only DSCR loans: low payment, reset risk

An interest-only DSCR loan requires scheduled payments that cover interest, not principal, for a defined period. Because the payment is smaller, the qualifying DSCR, the ratio of rent to the qualifying payment, can rise. The tradeoff is direct: the loan balance doesn't decline during the interest-only period, and the required payment can rise once amortization begins. This post walks through three payments to compute in order: during interest-only, after recast, and at the planned exit, before choosing the structure.

Step one: compute the interest-only payment yourself

The monthly interest-only payment is the loan balance times the annual note rate, divided by twelve. On a $300,000 loan at a fixed 7.50% note rate, $300,000 times 0.075 is $22,500 of interest per year, and $22,500 divided by twelve is $1,875 per month. The fully amortizing payment, the payment that repays both interest and principal over the full term, works out differently: on the same balance, rate, and 30-year schedule, it's about $2,098 per month. Interest-only cuts the initial payment by about $223 in this illustration. Every figure here is illustrative, not a quote.

Interest-only doesn't mean the balance grows. When every required interest payment gets made in full, the scheduled balance stays level: no principal is repaid, but none is added either. That's different from negative amortization, a structure where unpaid interest can be added to the balance.

Step two: see how the smaller payment changes DSCR

Taxes, insurance, and association dues don't disappear, they sit in the qualifying payment alongside principal and interest. The table below runs the same $300,000 loan at 7.50% with $500 of non-debt PITIA items and $3,000 in gross rent. The first row's arithmetic: $1,875 plus $500 is $2,375, and $3,000 divided by $2,375 is 1.26x. In the amortizing row, $2,098 plus $500 is about $2,598, and $3,000 divided by $2,598 is 1.15x. DSCR rises under interest-only because principal leaves the payment and the denominator shrinks. Program rules can differ, so run the calculation with the lender's actual qualifying payment in the DSCR calculator.

Step three: compute the recast payment

A recast is the moment the interest-only period ends and the loan starts amortizing. First-time borrowers often miss this part: the full $300,000 balance is still there, but now it has to be repaid over the remaining 20 years instead of 30. Spreading the same balance over a shorter runway produces a payment of about $2,417 per month, roughly $542, or 29%, above the interest-only payment. The DSCR falls from 1.26x to about 1.03x if rent hasn't changed. It's like paying only the minimum on a bill for ten years: the balance was never shrinking, and the catch-up schedule is steeper because less time remains.

This is a recast risk, not a rate forecast. If the note is adjustable, a future index and margin can add a further rate change on top of the recast, worth modeling in the ARM reset tool. The Consumer Financial Protection Bureau also cautions borrowers against assuming a refinance or sale will be available when the payment rises; the CFPB publishes plain-language explanations of interest-only loans and their disclosures.

The three-case test before choosing interest-only

• Case 1, today: figure DSCR using the lender's actual interest-only qualifying payment along with current taxes, insurance, and HOA dues.
• Case 2, recast: calculate the payment over the remaining amortization term, even when a refinance is expected before then.
• Case 3, stress: rerun the recast case with lower rent, higher insurance, and a higher rate if the loan can adjust or will need refinancing.

When the structure can fit

• A renovation or lease-up plan has a fixed timeline, and the cash saved stays inside the property's reserve account.
• The investor wants near-term liquidity and has a documented refinance, sale, or principal-paydown decision date.
• The deal qualifies on the future amortizing payment, not only on the introductory payment.
• The hold-period model shows enough equity from appreciation or planned paydown without relying on scheduled amortization.

When an amortizing loan is usually the cleaner choice

• The acquisition only works at the interest-only payment and leaves little room for rent or expense variance.
• The investment thesis depends on automatic principal reduction to build equity.
• The exit date is uncertain, or a prepayment penalty could block the planned refinance.
• The payment after recast would push the property below the investor's minimum coverage target.

Two things need verifying before treating the DSCR improvement as real. Not every lender calculates qualifying DSCR from the interest-only payment: eligibility, qualifying-payment treatment, maximum leverage, and interest-only duration are all program-specific, so ask for the exact payment the lender will use. And extra principal can often be paid during the interest-only period, but the note and servicing rules control how it's applied and whether the scheduled payment changes, so confirm the process and check the loan's prepayment terms before making a large paydown.

An interest-only DSCR loan is a cash-flow structure, not free savings. The comparison that matters lines up five numbers side by side: initial payment, future amortizing payment, stressed payment, remaining balance, and exit costs. If the deal survives all five, the lower early payment is useful, not just comfortable.

Use interest-only when the early payment relief has a specific job, and the deal still has to work after the interest-only period ends. Don't underwrite the acquisition as if the introductory payment lasts forever.

Treat every figure here as an assumption to test. What governs a real file is the responsible provider's current, dated eligibility and pricing materials, so check the scenario against those before you rely on it.

• Model rent and PITIA in the DSCR calculator →
• Model an adjustable-rate reset →
• Sensitivity analysis: rent and PITIA →
• CFPB: consumer mortgage resources →