Pay only interest — principal stays untouched until later.
An interest-only loan requires the borrower to pay only the interest accruing on the principal balance — no principal reduction — for a defined period. After the IO period ends, the loan either fully amortizes over the remaining term or matures with a balloon payment of the original principal.
Interest-only loans serve specific real estate use cases: bridge loans (during the value-add reposition), construction loans (during the build), and increasingly, some DSCR rental loans with 5–10 year IO periods. The common thread: the borrower wants maximum cash flow during a transition period and plans to refi, sell, or transition to amortizing payments later.
The math is simple: on a $500,000 loan at 8%, the interest-only payment is $500,000 × 8% ÷ 12 = $3,333/month. The same loan amortizing over 30 years would be $3,669/month — only $336 more, but with $336 going to principal each month. The longer the loan and lower the rate, the smaller the gap between IO and amortizing payments.
For bridge loans, IO is standard — the property isn't producing stabilized income yet, so cash flow needs to be conserved. For construction loans, IO is funded from an interest reserve built into the loan itself, so the borrower has no out-of-pocket payment. For DSCR rental loans, IO improves day-one cash-on-cash return but builds no equity through paydown — investors using IO typically plan to grow equity through appreciation, not amortization.
The trade-off is real: no equity buildup from amortization, more interest paid over the life of the loan, and a larger balloon (or full principal still owed at IO-period end). The borrower needs a clear plan for what happens when IO ends — refinance, sale, or pivot to amortizing payments. Operators using IO without that plan often get squeezed when the IO period rolls and payments jump 15–25%.
| Loan amount | $450,000 |
| Rate | 7.75% |
| Term | 30 years |
| Fully amortizing monthly payment | $3,223 |
| – Interest portion (year 1) | $2,905 |
| – Principal portion (year 1) | $318 |
| Interest-only payment (during IO period) | $2,906 |
| Monthly cash flow improvement on IO | $317 |
| Annual cash flow improvement | $3,800 |
The loan either fully amortizes over the remaining term (causing a payment jump) or matures with a balloon payment of the original principal. The borrower needs a plan: refinance, sell, or accept the higher amortizing payment.
For specific use cases (bridge, construction, value-add) — yes, it's standard practice. For long-term buy-and-hold, IO is a tactical choice that improves cash flow at the cost of equity buildup. The right answer depends on your hold plan.
On DSCR and rental programs, IO rates are typically 25–50 bps higher than amortizing for the same loan. On bridge and construction, IO is built into the product so there's no rate differential.
Yes — IO requires only interest, but you can always prepay principal. Some borrowers use IO for flexibility, paying extra when cash flow allows.
Most major DSCR programs offer IO as an option, typically with 5, 7, or 10-year IO periods. Some require a slight rate premium for the IO option.
Matrix offers interest-only options on DSCR rental, bridge, and construction programs — built around your strategy and timeline.
