Mortgage Glossary
Interest Only (IO)
A loan feature where monthly payments cover only interest — no principal — for an initial period of typically 10 years.
What is an interest-only loan?
An interest-only (IO) loan is a mortgage whose required monthly payment covers only the accrued interest during an initial IO period — no principal pay-down. After the IO period ends, the loan re-amortizes over the remaining term, and the monthly payment becomes meaningfully higher because principal must now be paid back over a compressed amortization schedule.
On a 30-year IO loan with a 10-year IO period: years 1-10 pay only interest, and years 11-30 amortize the full principal over 20 years. On a 40-year IO loan with the same 10-year IO period: years 1-10 pay only interest, and years 11-40 amortize over 30 years — resulting in a noticeably lower post-IO payment than the 30-year structure.
IO loans are popular with real estate investors because they maximize monthly cash flow during the hold period. The trade-off: you don’t build equity through amortization during the IO period — only through appreciation (or extra voluntary principal payments). They also help with DSCR qualification, because the lower monthly payment puts a smaller PITIA (or ITIA) in the denominator of the ratio.
How Interest Only applies at Total Quality Lending
Interest-only is available on TQL’s DSCR program (680+ FICO, max 75% LTV on purchase, 70% on cash-out) and on Prime Time (660+ FICO, up to 90% LTV on primary). IO is offered on both 30-year and 40-year loan structures with a 10-year IO period. During the IO period, DSCR is calculated against ITIA (no principal component) on the DSCR program.
FAQs
How long is the interest-only period?
Typically 10 years on a 30-year IO loan and 10 years on a 40-year IO loan. After the IO period ends, the loan re-amortizes over the remaining term — so a 30-year IO loan becomes a 20-year amortizing loan in year 11, with a higher monthly payment.
Does interest-only affect DSCR qualification?
Yes — in your favor. During the IO period the monthly payment is lower (no principal), so DSCR is calculated against a smaller PITIA. This means a property that DSCRs at 1.05 on a fully-amortizing loan might DSCR at 1.25 on an interest-only loan, unlocking better LTV tiers.
Who should use interest-only?
Investors maximizing cash flow during a hold period, BRRRR strategists pulling cash out before a sale, or borrowers expecting income to rise meaningfully before the IO period ends. Interest-only is not free money — you're not building equity through amortization during the IO period, only through appreciation and rent-driven pay-down of principal if you make extra payments.
Get a quote from a real human
Talk to a loan officer who can model your DSCR with and without an IO structure.