Interest Only DSCR
Rental Property Investor · Wichita Falls, TX · Member since 2018 · 353 posts · 80 votes
Interest Only DSCR
Most Popular Reply
Investor · Member since 2022 · 107 posts · 67 votes
3yDisclaimer, I haven't used a DSCR loan yet. However I've been doing a fair amount of research on them and recently gotten the scoop from my lender.
My understanding of why a DSCR is beneficial to investors is that:
-The underwriting of the loan is done based on the deal itself and not your current income position. Meaning you can get the loan without claiming high income or if you have just switched to self-employed(as long as the deal will cash-flow or break even).
-More friendly seasoning periods for cash-out refi's. With Fannie Mae's new 12 month cash-out refinance guidelines, DSCR allows you to cash out in 6 months or sooner on a BRRRR.
-Interest only payments allow you to offset the higher cost of interest rates. I believe DSCR interest rates usually run 1.5-2.5% higher than conventional. So if you're using DSCR as a short term option until you sell, or refinance, int only can help monthly payments.
A possible downsides(other than higher int rates) is that there may be an early pay-off fee. This I've heard can vary between lenders and you may need to shop around before you find the right one for you.
I hope this helps. And anybody feel free to correct me if I'm wrong!
24 Replies
- Investor · Member since 2022 · 107 posts · 67 votes3y
Disclaimer, I haven't used a DSCR loan yet. However I've been doing a fair amount of research on them and recently gotten the scoop from my lender.
My understanding of why a DSCR is beneficial to investors is that:
-The underwriting of the loan is done based on the deal itself and not your current income position. Meaning you can get the loan without claiming high income or if you have just switched to self-employed(as long as the deal will cash-flow or break even).
-More friendly seasoning periods for cash-out refi's. With Fannie Mae's new 12 month cash-out refinance guidelines, DSCR allows you to cash out in 6 months or sooner on a BRRRR.
-Interest only payments allow you to offset the higher cost of interest rates. I believe DSCR interest rates usually run 1.5-2.5% higher than conventional. So if you're using DSCR as a short term option until you sell, or refinance, int only can help monthly payments.
A possible downsides(other than higher int rates) is that there may be an early pay-off fee. This I've heard can vary between lenders and you may need to shop around before you find the right one for you.
I hope this helps. And anybody feel free to correct me if I'm wrong!
Quote from @Forrest T Schue:
Disclaimer, I haven't used a DSCR loan yet. However I've been doing a fair amount of research on them and recently gotten the scoop from my lender.
My understanding of why a DSCR is beneficial to investors is that:
-The underwriting of the loan is done based on the deal itself and not your current income position. Meaning you can get the loan without claiming high income or if you have just switched to self-employed(as long as the deal will cash-flow or break even).
-More friendly seasoning periods for cash-out refi's. With Fannie Mae's new 12 month cash-out refinance guidelines, DSCR allows you to cash out in 6 months or sooner on a BRRRR.
-Interest only payments allow you to offset the higher cost of interest rates. I believe DSCR interest rates usually run 1.5-2.5% higher than conventional. So if you're using DSCR as a short term option until you sell, or refinance, int only can help monthly payments.
A possible downsides(other than higher int rates) is that there may be an early pay-off fee. This I've heard can vary between lenders and you may need to shop around before you find the right one for you.
I hope this helps. And anybody feel free to correct me if I'm wrong!
No, it's called an interest only loan. You're still stuck with interest.
IO loans really only save you in a high cost areas or high appreciating areas that you have to bid up. In both those cases, you're saving a principal payment for the first 10 years but you gain no equity in the first 10 years. At 20-25% down, that's about 8-10% in equity you're not achieving. If you are really saving significant money on your PITI by going IO, you're likely buying in high(er) cost areas so that "savings" is actually going to bite you in the *** if/when the property appreciates in that first decade. If you're buying in low(er) ish areas, you're saving a very little amount of principal and gaining no equity in those 10 years. Run the ITI payment with an IO vs a PITI loan in $300k houses @ 7.5% and $800k @ 7.5%, you'll see what I am saying. Then check what you believe is going to happen: 3-5% appreciation, more than 5%, sub 3% and see if it's worth missing the principal payment.DSCR loans are usually a point higher than CONV, and was that way with me at least the last 10 weeks. But I'm now being told 1.5-2% simply cause the biggest of the biggest are scared to lend. These work when you're trying to immediately finance under your LLC, cannot be underwritten appropriately, or simply want to value the deal at the deal level-- PITI less NOI. With higher rates on these your NOI is up, and it's unlikely even at CONV rates you're getting intrinsic so DSCR is particularly harder with even higher rates. I've done a few DSCR loans because I felt rates would go up and I'd then go CONV and transfer title/deed to my LLCs. To make DSCR intrinsic, you're going to have to put like 33% + down to get them to bite. Some do under 1x DSCR(meaning PITI=NOI or less), but you're going to paying for that in rate making it even less intrinsic.
- Investor · Member since 2022 · 107 posts · 67 votes3y
@V.G Jason Yes sorry, that is what I meant. You do not make principle payments, offsetting the higher cost of interest. I'm going to re-word that.
Thanks.
- 3yStephanie P.Pro MemberWashington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
Quote from @Nathan Frost:
Can someone explain to me how DSCR works and why it would be better to do interest only payments vs a 30 year mortgage on an investment property?
Seems the interest only quotes are still high and not worth it.
There are two 40 year options out there right now. 10 year interest only that fully amortizes years 11-40 and a 40 year fixed option. Both reduce the monthly payment, improving cash flow, over the 30 year fixed option.
DSCR is based on the rents vs the monthly payments. Some companies don't care about a ratio at all if the loan to value is low enough while others will go down to a .75 ratio so the rents can cover 75% of the monthly payments. The most common is for the rents to cover the mortgage completely or a 1.0 debt ratio and above.
The borrower or guarantor's credit is the other main consideration on these loans.
- Lender · Los Angeles, CA · Member since 2017 · 916 posts · 647 votes3y
@Nathan Frost I/O loans only make sense when you have higher loan amounts and are used to debt cover when the ratios are tight. Smaller loan amounts, say 300k and below, the monthly difference isnt a lot. Also, I/O can be used for keeping the property for 3-5 years since most of the first five years of a mortgage is interest anyway.
To review, below is what DSCR is:
DSCR loan, aka lite doc or business purpose loans, uses the rents you receive on the property and divided by the new loan PITI to receive a ratio. Simple math would be a PITI of 1,000 and rents of 1500. That would be a debt service cover ratio of 1.5. Basically, this property cash flows. FICO, experience, and LTV are also factors but this is the basis of the loan. No need for tax returns, Verification of Employment, or income. I have been through this loan as an investor myself and originate these loans all the time.
Rates at this time are 7-9% depending on the factors mentioned above.
DM with questions as Im happy to help.
- 3yMatthew CrivelliBusiness MemberLender · MA · Member since 2021 · 1k+ posts · 1k+ votes
Stick with non I/O if possible. Every lender will have a different minimum Debt Service Coverage Ratio. Our minimum DSCR is 1.1.
Simply - Principle, interest, taxes, & insurance X DSCR of 1.1
If the PITI equals $1,000 Per month you would need actual or market rent at $1,100 per month to cover the DSCR of 1.1.
Freedom Capital Funding, LLC523 Reviews - Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes3y
DSCR qualifies the property, not the borrower. It is attractive for new investors who can not take out commercial loans due to longevity in the business. If the rents cover the mortgage and you have a decent credit score you will get the loan. Interest only is one way to make the property cash flow or meet DSCR requirements if it doesn't.
- 3yDoug SmithPro MemberLender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votes
Sure...we do a lot of them. DSCR stands for "Debt Service Coverage Ratio". It is not calculated the same way that a commercial bank calculates DSCR. It's actually much simpler. DSCR = Monthly Rent / Monthly Principal + Monthly Interest + Monthly Taxes + Monthly Insurance + Monthly HOA Fees. You want to see that figure come out to be a 1.0 or higher. Some lenders go down lower (0.75), but that means its negatively cash flowing. The higher the better. We'll usually want to see at least a 680 credit score or better. We'll only cash flow the property...not you personally and we'll only want to lend to an entity like an LLC or S-Corp with you personally guarantying the loan. Interest only is a popular option to make cash flow better, but most DSCR loans are going to have a prepayment penalty...the shorter the PPP the higher the rate. Many savy investors go for a 5 year fixed rate where it goes variable thereafter to keep rates lower. For sure, rates are significantly higher. In late February of 2022, I did a DSCR for 4.875%. Now the rates hover around 8%. You have tons of options with these loans. There are also a lot of factors that go into determining rates, so it's hard to tell you what the rate would be without knowing more, but going I/O is all about cash flow with hopes that appreciation over time will make you your $. Let me know if you have questions or need help.
There is a lot more to IO vs PITI. A few points have been touched on here. I have seen this topic come up before. The comprehensive answer is long and can be difficult to understand because there are so many different scenarios and applications.
They both serve a purpose for specific investment strategies. Market trends, the state of the economy, and real estate cycle can also be factors because they are predictors. Depending on your personal investment strategy/risk tolerance, you would chose one or the other.
As stated already, smaller loans are affected to a lesser degree due to the minimal difference in monthly payment. Additionally, if you are a hobby investor or full time investor will dictate which one to choose. If you invest as a hobby and have a steady income elsewhere (W2, etc) than you care a bit less how all those factor make a difference and your risk tolerance may also be different.
- Rental Property Investor · Wichita Falls, TX · Member since 2018 · 353 posts · 80 votes3y
Quote from @V.G Jason:
Quote from @Forrest T Schue:
Disclaimer, I haven't used a DSCR loan yet. However I've been doing a fair amount of research on them and recently gotten the scoop from my lender.
My understanding of why a DSCR is beneficial to investors is that:
-The underwriting of the loan is done based on the deal itself and not your current income position. Meaning you can get the loan without claiming high income or if you have just switched to self-employed(as long as the deal will cash-flow or break even).
-More friendly seasoning periods for cash-out refi's. With Fannie Mae's new 12 month cash-out refinance guidelines, DSCR allows you to cash out in 6 months or sooner on a BRRRR.
-Interest only payments allow you to offset the higher cost of interest rates. I believe DSCR interest rates usually run 1.5-2.5% higher than conventional. So if you're using DSCR as a short term option until you sell, or refinance, int only can help monthly payments.
A possible downsides(other than higher int rates) is that there may be an early pay-off fee. This I've heard can vary between lenders and you may need to shop around before you find the right one for you.
I hope this helps. And anybody feel free to correct me if I'm wrong!
No, it's called an interest only loan. You're still stuck with interest.
IO loans really only save you in a high cost areas or high appreciating areas that you have to bid up. In both those cases, you're saving a principal payment for the first 10 years but you gain no equity in the first 10 years. At 20-25% down, that's about 8-10% in equity you're not achieving. If you are really saving significant money on your PITI by going IO, you're likely buying in high(er) cost areas so that "savings" is actually going to bite you in the *** if/when the property appreciates in that first decade. If you're buying in low(er) ish areas, you're saving a very little amount of principal and gaining no equity in those 10 years. Run the ITI payment with an IO vs a PITI loan in $300k houses @ 7.5% and $800k @ 7.5%, you'll see what I am saying. Then check what you believe is going to happen: 3-5% appreciation, more than 5%, sub 3% and see if it's worth missing the principal payment.DSCR loans are usually a point higher than CONV, and was that way with me at least the last 10 weeks. But I'm now being told 1.5-2% simply cause the biggest of the biggest are scared to lend. These work when you're trying to immediately finance under your LLC, cannot be underwritten appropriately, or simply want to value the deal at the deal level-- PITI less NOI. With higher rates on these your NOI is up, and it's unlikely even at CONV rates you're getting intrinsic so DSCR is particularly harder with even higher rates. I've done a few DSCR loans because I felt rates would go up and I'd then go CONV and transfer title/deed to my LLCs. To make DSCR intrinsic, you're going to have to put like 33% + down to get them to bite. Some do under 1x DSCR(meaning PITI=NOI or less), but you're going to paying for that in rate making it even less intrinsic.
This makes sense because I was getting quotes for $850 IO but could get a 30 year note for around $950 and didn't feel like the IO is worth it. Was trying to see examples in my area why one would want IO payments unless it is half the PITI payment to generate double the cash flow.
- Rental Property Investor · Wichita Falls, TX · Member since 2018 · 353 posts · 80 votes3y
Quote from @Stephanie P.:
Quote from @Nathan Frost:
Can someone explain to me how DSCR works and why it would be better to do interest only payments vs a 30 year mortgage on an investment property?
Seems the interest only quotes are still high and not worth it.
There are two 40 year options out there right now. 10 year interest only that fully amortizes years 11-40 and a 40 year fixed option. Both reduce the monthly payment, improving cash flow, over the 30 year fixed option.
DSCR is based on the rents vs the monthly payments. Some companies don't care about a ratio at all if the loan to value is low enough while others will go down to a .75 ratio so the rents can cover 75% of the monthly payments. The most common is for the rents to cover the mortgage completely or a 1.0 debt ratio and above.
The borrower or guarantor's credit is the other main consideration on these loans.
So why do IO vs PITI the first 10 years? I have had some quotes on 100k homes here and the difference isn't much. Why not generate equity for those first 10 years? I would do IO if the payments were 200-300 less the PITI.
Also, 20% is still required and makes me lean towards non DSCR loans. Just trying to understand the advantage which seems to be on larger loans.
- Lender · Member since 2021 · 100 posts · 164 votes3y
Quote from @Stephanie P.:
Quote from @Nathan Frost:
Can someone explain to me how DSCR works and why it would be better to do interest only payments vs a 30 year mortgage on an investment property?
Seems the interest only quotes are still high and not worth it.
There are two 40 year options out there right now. 10 year interest only that fully amortizes years 11-40 and a 40 year fixed option. Both reduce the monthly payment, improving cash flow, over the 30 year fixed option.
DSCR is based on the rents vs the monthly payments. Some companies don't care about a ratio at all if the loan to value is low enough while others will go down to a .75 ratio so the rents can cover 75% of the monthly payments. The most common is for the rents to cover the mortgage completely or a 1.0 debt ratio and above.
The borrower or guarantor's credit is the other main consideration on these loans.
@Stephanie P. Who have you seen offering the 10 Yr IO w/ a 40 yr term and 40 Yr FRM for DSCR?
- 3yStephanie P.Pro MemberWashington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
Quote from @Nathan Frost:
Quote from @Stephanie P.:
Quote from @Nathan Frost:
Can someone explain to me how DSCR works and why it would be better to do interest only payments vs a 30 year mortgage on an investment property?
Seems the interest only quotes are still high and not worth it.
There are two 40 year options out there right now. 10 year interest only that fully amortizes years 11-40 and a 40 year fixed option. Both reduce the monthly payment, improving cash flow, over the 30 year fixed option.
DSCR is based on the rents vs the monthly payments. Some companies don't care about a ratio at all if the loan to value is low enough while others will go down to a .75 ratio so the rents can cover 75% of the monthly payments. The most common is for the rents to cover the mortgage completely or a 1.0 debt ratio and above.
The borrower or guarantor's credit is the other main consideration on these loans.
So why do IO vs PITI the first 10 years? I have had some quotes on 100k homes here and the difference isn't much. Why not generate equity for those first 10 years? I would do IO if the payments were 200-300 less the PITI.
Also, 20% is still required and makes me lean towards non DSCR loans. Just trying to understand the advantage which seems to be on larger loans.
The 40 year am is relatively new and not a lot of lenders offer it. 10 year IO with the additional 30 fully amortized is readily available. In some cases, you can get an 85% ltv, but the DSCR may not support it.
- 3yStephanie P.Pro MemberWashington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
Quote from @Riaz Gillani:
Quote from @Stephanie P.:
Quote from @Nathan Frost:
Can someone explain to me how DSCR works and why it would be better to do interest only payments vs a 30 year mortgage on an investment property?
Seems the interest only quotes are still high and not worth it.
There are two 40 year options out there right now. 10 year interest only that fully amortizes years 11-40 and a 40 year fixed option. Both reduce the monthly payment, improving cash flow, over the 30 year fixed option.
DSCR is based on the rents vs the monthly payments. Some companies don't care about a ratio at all if the loan to value is low enough while others will go down to a .75 ratio so the rents can cover 75% of the monthly payments. The most common is for the rents to cover the mortgage completely or a 1.0 debt ratio and above.
The borrower or guarantor's credit is the other main consideration on these loans.
@Stephanie P. Who have you seen offering the 10 Yr IO w/ a 40 yr term and 40 Yr FRM for DSCR?
It's a 10 year IO and then a 30 year fully amortized loan after that for a total of 40 years or a 40 year fully amortized loan. We have a lender that offers it. I can get my rep in touch with you if you'd like.
- Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes3y
@Nathan Frost I just closed on a DSCR loan. Pros, quick, easy, not a lot of paperwork. It follows the 1% rule. If rents cover bills, you're good to go. CONS: Interest rates but higher, and prepayment penalty. I hope this is helpful!
- 3yMark MunsonBusiness MemberLender · Orlando, FL · Member since 2022 · 440 posts · 300 votes
Floor rates on DSCR are hovering around 7-7.5% with most DSCR lenders I come across. There are a lot of moving parts, such as the ability to tack on a 10 year I/O period with 30-years fully amortized after that, thus a 40-year loan. You can also roll into the loan a buy down on the interest rate. You can up the rate to get a lower prepayment penalty and other various things. If you go that route, just make sure the lender locks your rate for 45 days at the beginning of the loan process, I won't work with a bank that floats the rate, as that is far more risky.
Quote from @Nathan Frost:
Quote from @V.G Jason:
Quote from @Forrest T Schue:
Disclaimer, I haven't used a DSCR loan yet. However I've been doing a fair amount of research on them and recently gotten the scoop from my lender.
My understanding of why a DSCR is beneficial to investors is that:
-The underwriting of the loan is done based on the deal itself and not your current income position. Meaning you can get the loan without claiming high income or if you have just switched to self-employed(as long as the deal will cash-flow or break even).
-More friendly seasoning periods for cash-out refi's. With Fannie Mae's new 12 month cash-out refinance guidelines, DSCR allows you to cash out in 6 months or sooner on a BRRRR.
-Interest only payments allow you to offset the higher cost of interest rates. I believe DSCR interest rates usually run 1.5-2.5% higher than conventional. So if you're using DSCR as a short term option until you sell, or refinance, int only can help monthly payments.
A possible downsides(other than higher int rates) is that there may be an early pay-off fee. This I've heard can vary between lenders and you may need to shop around before you find the right one for you.
I hope this helps. And anybody feel free to correct me if I'm wrong!
No, it's called an interest only loan. You're still stuck with interest.
IO loans really only save you in a high cost areas or high appreciating areas that you have to bid up. In both those cases, you're saving a principal payment for the first 10 years but you gain no equity in the first 10 years. At 20-25% down, that's about 8-10% in equity you're not achieving. If you are really saving significant money on your PITI by going IO, you're likely buying in high(er) cost areas so that "savings" is actually going to bite you in the *** if/when the property appreciates in that first decade. If you're buying in low(er) ish areas, you're saving a very little amount of principal and gaining no equity in those 10 years. Run the ITI payment with an IO vs a PITI loan in $300k houses @ 7.5% and $800k @ 7.5%, you'll see what I am saying. Then check what you believe is going to happen: 3-5% appreciation, more than 5%, sub 3% and see if it's worth missing the principal payment.DSCR loans are usually a point higher than CONV, and was that way with me at least the last 10 weeks. But I'm now being told 1.5-2% simply cause the biggest of the biggest are scared to lend. These work when you're trying to immediately finance under your LLC, cannot be underwritten appropriately, or simply want to value the deal at the deal level-- PITI less NOI. With higher rates on these your NOI is up, and it's unlikely even at CONV rates you're getting intrinsic so DSCR is particularly harder with even higher rates. I've done a few DSCR loans because I felt rates would go up and I'd then go CONV and transfer title/deed to my LLCs. To make DSCR intrinsic, you're going to have to put like 33% + down to get them to bite. Some do under 1x DSCR(meaning PITI=NOI or less), but you're going to paying for that in rate making it even less intrinsic.
This makes sense because I was getting quotes for $850 IO but could get a 30 year note for around $950 and didn't feel like the IO is worth it. Was trying to see examples in my area why one would want IO payments unless it is half the PITI payment to generate double the cash flow.
You'll notice the same on the top end houses. Say $5000 mortgage with principal vs not, it's likely in a good area--therefore will appreciate. You're saving the differential and in that case 8-10% equity that is way too valuable.
If you're buying 10-12 relatively expensive houses and going IO let's you get to that number as opposed to 7-8 due to principal savings, you'll see some net benefit. But then you're upping the risk, too.- Real Estate Agent · Tampa St. Pete Clearwater, Apollo Beach · Member since 2023 · 15 posts · 4 votes3y
@Doug Smith Thank you for breaking down the ins-and-outs of DSCR loans. As I'm getting ready to get pre-qual'd for my first investment property, I have been trying to determine whether to go with a DSCR or a CONV 30 yr loan. I am looking to stay at or below $250K on a SFH. So far, I cannot tell the advantage of going the DSCR way. Other than the "expediency" factor, as a first time investor, they both seem to require 25% down, DSCR's interest rate is higher, and DSCRs seem to require the investor to have an LLC. Am I missing something? Why do people go chose to go DSCR vs CONV? Thank you in advance for your feedback.
- 2wDoug SmithPro MemberLender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votes
Good Morning Chris. This is a long explanation to a short question, so buckle up. One item I do want to clear up before I go into my explanation for you. You CAN do a DSCR in your personal name with many lenders, but Fannie/Freddie (Conventional) will not allow you to do a Conventional loan in your LLC. So, yes, you can do a DSCR without setting up an entity like an LLC. Now, so my explanation. You would use an LLC where you can not meet the cash flow requirements or a Conventional loan or if you're looking to scale. A Conventional Loan uses a "Global Cash Flow" where it looks at ALL of your Income and ALL of your debt, meaning from an income standpoint, it is going to consider your job income, your other businesses, your other properties, Social Security, and other forms of income. It will compare that to all of your mortgage payments, property insurances and taxes for all of your properties, your car, your credit cards, your student loans...you get the idea. Let's use an example. Let's say you currently have a job making $5000 per month and your mortgage payment, your car payment, credit card payments, etc equal $2150 per month. Your Debt to Income Ratio...what Conventional Loans use, is DTI=Debt/Income = 2150/5000 = 43%. That Debt to Income Ratio would qualify under Fannie Mae guidelines...you would qualify so far, but let's add a great new property getting you $2000 per month in rent and your Principle + Interest + Taxes + Insurance + HOA = $1800...a nice positive cash flow. Now, you have income of $7000 ($5K + the new $2K) and you now have debts of $3950. The Debt to Income Calculation now is $3950/$7000, or 56%. You likely no longer qualify under Fannie/Freddie guidelines. Every property you add will push that DTI figure higher and higher. Does that make sense? You might get to use conventional financing for the first property...perhaps two...but that trick of math in the way Conventional loans calculate DTI messes you up. Now, let's discuss how the DSRC loan works. Investor Property DSCR is calculated differently than how banks do it. For our purposes, the Debt Service Coverage Ratio = Income / (Principle + Interest + Taxes + Insurance + HOA)...that's it and it only looks at the subject property...not a global cash flow like we discussed before. Notice the its income/expenses where DTI is expenses / income...the inverse. By contrast, banks add in other things like management fees, vacancy factors, replacement reserves, etc...but you don't have to worry about that if you're getting the newer-style DSCR loan. Banks usually want 1.25X to 1.30X when approving their commercial loans...after those additional items are added in. The style people discuss on BP only usually wants a 1.0X and sometimes much lower will qualify. In our example above, your DSCR would be DSCR = Income/Expenses, or $2000/$1800 = 1.11X...ignoring the rest of your income and expenses...you would qualify. Now, it does also take into account your Character/Credit, Collateral, and a few other factors, but the way the Capacity/Ability to repay (DTI and DSCR) are calculated are different. It helps you qualify when overall cash flow is tight. Yes, the rate can be a wee bit higher than conventional, but not as much as you might think. Does that all answer your question?
- Lender · Nationwide · Member since 2018 · 571 posts · 310 votes3y
@Chris Rodriguez DSCR loans don't check tax or income statements.
- 2wErik EstradaBusiness MemberLender · Member since 2022 · 6k+ posts · 1k+ votes
IO makes sense on temporary high rate environments. Say you are looking to cash out and your DSCR is tight, you are looking to refi in a year or so, IO will make more sense since you will barely make a dent on your principal balance the first couple of years. The extra cashflow you can use for reserves while you wait for rates to get better.
LuxePrivate Investments LLC 572 ReviewsQuote from @Erik Estrada:
IO makes sense on temporary high rate environments. Say you are looking to cash out and your DSCR is tight, you are looking to refi in a year or so, IO will make more sense since you will barely make a dent on your principal balance the first couple of years. The extra cashflow you can use for reserves while you wait for rates to get better.
If you need to "wait" for rates to get better, or add to your cash reserves. You shouldn't have even stepped in.
Secondly, IO is a directional move against rates. We've heard this song & dance for too long; there's so many agents and lenders I have yet to call out that preached just make it to 2025, date the rate/marry the house, and other nonsense. In fact, I may go back and call them all out as rates are about to reach new highs. You might be one of them.
Within 10 years, if the rates are flat or slightly less-- you will have a violent re-rating when you re-finance. Of course, as a lender you would love a new forced mortgage, but the bagholder will get wrecked. Again, car salesman advice. They buy so rarely, let's screw em over cause doubt they'd buy again.
Let's stop investing on a trying to predict variables, and crossing our fingers. And focus on investing via preparation. The first step is to stop taking advice from people selling the debt.
- Pike County GA · Member since 2024 · 45 posts · 17 votes2w
Following this post... There is a lot of great information here. I appreciate all of you guys insight!
- 1wRobin SimonBusiness MemberLender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
Hi Nathan, DSCR Loans that are "IO" is really a misnomer, it's better described as "Partial-IO" since the interest-only period is for 10 of the 30 years (the first 10), and then it's a 20-year am schedule on the back 20.
Now here's where the math gets surprising, and where a lot of investors leave cash flow on the table by shopping on rate alone: an IO quote with a HIGHER rate can still have a much LOWER monthly payment than a fully amortizing quote with a lower rate. Take a $400k loan, fully amortizing at 6.75% is $2,594/mo, while Partial-IO at 7.25%, a full half-point higher, is just $2,417/mo, roughly $178 less every single month for the first ten years, even with the "worse" rate! Push the IO rate all the way to 7.5% and the payment ($2,500/mo) still beats the 6.75% fully amortizing payment.
So "the IO quotes are still high" is only half the story, the rate might be higher, but the payment (which is what the rent actually has to cover) can be a lot lower. The trade-off is that the loan balance doesn't budge during the IO period and the payment steps up after year 10 (to about $3,162/mo in the 7.25% example), so it tends to make the most sense if you're prioritizing early cash flow, plan to sell or refi within 10 years, or need the lower payment to help the DSCR ratio qualify (depending on how the lender calculates it). If you plan to hold for the long haul, fully amortizing can still win out over the full 30 years.
Harpoon Capital514 Reviews
Join the conversationCreate a free account to reply, vote on answers and follow this thread.