Interest-Only Loan
A loan where payments cover only the interest for a set period, with no principal reduction. The balance stays flat until the interest-only period ends or the balloon comes due. Common on bridge and some DSCR loans.
An interest-only (IO) loan is one where your payment covers only the interest — no principal — for some or all of the term. Because no principal is paid down, the loan balance stays flat until the IO period ends (after which payments typically jump to fully amortizing) or the loan matures with a balloon payment.
How it lowers the payment
Stripping out principal makes the monthly payment meaningfully smaller. On a $300,000 loan at 7.5%:
| Structure | Monthly payment |
|---|---|
| 30-yr amortizing | ~$2,098 |
| Interest-only | ~$1,875 |
The ~$223/month difference is the principal you're not paying. That lower payment is the whole appeal.
Why investors use interest-only
- Short-term loans. Nearly all hard money and bridge loans are interest-only — you'll repay the principal as a balloon from a sale or refinance, so paying it down monthly would just waste cash you need for the rehab.
- Maximizing cash flow and DSCR. Some DSCR loans offer an interest-only option. The lower payment means a lower PITIA, which raises the DSCR — sometimes the difference between qualifying and not, and it boosts in-pocket cash flow.
- Flexibility. IO preserves capital for other deals; you can always pay principal voluntarily.
The trade-offs
- No equity from paydown. Your balance doesn't shrink, so equity comes only from appreciation, not principal reduction.
- Payment shock. On a DSCR loan with, say, a 10-year IO period, payments rise sharply when amortization kicks in — make sure the property still cash-flows then.
- Slightly higher rate. Lenders sometimes price IO a touch higher to offset the slower principal recovery.
When IO makes sense
Interest-only fits short holds (where you'll never pay down principal anyway) and cash-flow-focused holds (where maximizing monthly cash flow or DSCR matters more than building equity through paydown). For a long-term buy-and-hold investor who values forced equity build, a fully amortizing loan may be the better fit. Match the structure to your strategy.
Frequently asked questions
Does an interest-only loan ever pay down the principal?
Not during the interest-only period — the balance stays flat. After the IO period ends, the loan usually converts to fully amortizing (with a higher payment), or the full principal comes due as a balloon. You can also pay principal voluntarily at any time to reduce the balance early.
Why would I want an interest-only DSCR loan?
The lower interest-only payment reduces PITIA, which raises your DSCR — sometimes enough to qualify a deal that wouldn't with an amortizing payment — and increases monthly cash flow. The trade-off is no equity from principal paydown and a payment increase when the IO period ends.
Are hard money loans interest-only?
Almost always. Hard money and bridge loans are short-term and interest-only, with the principal repaid as a balloon when you sell or refinance. Paying down principal monthly would tie up cash you need for the rehab, so IO is the standard structure for short-term investor financing.