When Will you Say Interest Only Payments Makes Sense on a Rental?

Question

I have property I procured with hard money which is approaching the due time for me to refinance into a conventional loan. I got a quote from a company we decided to move forward with. This will be a DSCR loan. However, it appears we underestimated the annual taxes, so I am being told that after factoring in the higher taxes the property will not meet the DSCR requirements. Lender tells me my best option is to do a 10 year interest only with a 30 year term.  I am new to RE investment and I am not sure if going the 10 year interest only is a good choice. I'm seeking advise on what my best options are? Thank you in advance

Robin Simon · Answer

The IO options are pretty good right now, not much of an additional cost and even with a higher rate, it often becomes a lower overall monthly payment!

Everything depends, but I think the main reason "not" to pursue it would be if the property is relatively low value and already comfortably cash flowing at full am

Jay Hurst · Answer

@Kingsley Addo   The first question is why a DSCR at all?  You mention conventional loan above so why not that? may be a reason just curious.  There are a lot of unlicensed brokers who only offer DSCR because they do not have the ability to originate any other loan because they are not licensed.   so just want to make sure that you property vetted that option.

Second, there are plenty of DSCR products that allow for DSCR ratio under 1.00 so you would not have to do an interest only to make the number work. They do depend on loan to value and credit score of course.

Third, have they given you any other options like lower your loan to value, buying down your rate, etc?  Because it is lending 101 to check the property taxes at the very beginning of the process just not sure if all avenues had been explored before going to IO.

Kingsley Addo · Answer

I just want to say a BIG thank you to all your responses. I must admit that your responses gave me a clearer picture of which direction to go. In this case I decided against I/O. Someone from here is helping me with a great option which I think I am going to pursue. Thank you all!

Andrew Postell · Answer

@Kingsley Addo was this lender not from here or something?  It takes 30 seconds for us to look up property taxes so I kind of feel like this should have been caught early on.  And can you not go with other loan types?  Meaning, conventional loans?

Now, should you do a 10 year, interest only payment?  What choice do you have?  If you can go conventional - then do that.  If not, do you have the extra money to bring to closing on this (assuming that's the case)?  If you can't do either of those, then your answer is to go with the interest only option or sell.  I mean, you could ask for an extension on your hard money loan...but that's already interest only and the rate, I would guess, is higher...and you are only extending it to not refinance.  Things won't magically change in a few months here so if you do choose to sell, then extend the HML.  If you don't want to sell, then your choice is to bring more to closing or take the 10 year I/O payment.

Carlos Ptriawan · Answer

IO is only making sense in the appreciated asset and appreciated market otherwise you are going against the tide.

But if it is single family why not try 30 years conventional ..... you need to be careful when seeing this IO loan, sometimes it's predatory and only useful to be used by the pro only.

Devin Peterson · Answer

If you are refinancing within the next couple of years interest only would potentially make sense. Do you know what the pre-payment penalty is that you are being quoted? I would watch out for getting a PPP longer than 2-3 years.

Jake Baker · Answer

As a flipper and BRRRR investor, I often find myself in this situation. I always shop at least three lenders at the same time because they all have access to different loan products. For me, a fixed rate is more important that the 10 year interest only you mentioned. You are bound to sell it or refinance in the next 5 years or so but having that fixed interest rate is key.

Erik Estrada · Answer

Hey Kingsley,

Do you plan on refinancing this mortgage again anytime soon? If so, IO could make sense as a short term fix.

What interest rate are you qualified at? This can also play a huge factor on being able to debt service. Also, what is the amount of cash out you are looking to net? There are some lenders that will be able to finance the fees without it having to affect your cash out.

Jay Hurst · Answer

We do cash out loan with no value seasoning where you end up in a conventional loan . I explained the process on this thread: https://www.biggerpockets.com/forums/853/topics/1157866-hypo...

When Will you Say Interest Only Payments Makes Sense on a Rental?

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