How much does choosing an Interest Only (or Partial-IO) DSCR Loan affect your rate?

[Robin Simon]

🤔How much does choosing an Interest Only (or Partial-IO) DSCR Loan affect your rate (and monthly payment)?
➡️Choosing a Partial-IO structure (usually 10 years of interest-only payments before fully amortizing for the remaining 20 years) typically comes with a higher interest rate—but a lower monthly payment. That may seem counterintuitive at first, but it makes sense once you understand the math: in the IO period, only interest is due, not principal, so even with a slightly higher rate, the monthly obligation is lower.

From a pricing standpoint, the difference is modest but meaningful:

For lower-LTV deals, the Partial-IO version of the loan might be priced 0.125% higher than its fully amortizing equivalent.

For higher-LTV loans, that increase may widen to 0.25%, reflecting the added risk of deferred principal repayment at higher leverage levels.

Still, the result is often a lower monthly payment overall. Also importantly, DSCR ratios are calculated based on the lower initial IO payment, so a pricing penalty for choosing a Partial-IO option may even be offset by moving into a higher DSCR ratio “bucket”!

Take a look at the difference in payments on $400,000 DSCR Loan. If structured to be Fully Amortizing with a rate of 6.875%, the loan will have a monthly payment of $2,628 for the first ten years of the term, while that same DSCR Loan, but with the Partial-IO structure utilized and thus a slightly higher 7.125% interest rate, will have a monthly payment of $2,375, a greater than $250 per month cash flow improvement, despite a higher interest rate!

Additional Factors for Best Rates and Terms for DSCR Loans: LLPAs and Overlays
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