Interest Only (IO)
What is an interest-only loan?
A loan feature where monthly payments cover only interest — no principal — for an initial period of typically 10 years.
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.