Interest-only mortgages are available for some investment properties, particularly through non-QM and other investor-focused loan programs.
During the interest-only period, your required principal and interest payment covers interest but does not reduce the loan balance.
That can improve near-term rental cash flow. It also creates a larger payment later when principal repayment begins.
The basic mechanics are the same as other interest-only mortgages, but the investment-property calculation centers on rent, cash flow and your expected holding period.
Interest-Only Investment Property Loan Basics
| Feature |
What It Means |
| Interest-only period |
You make scheduled interest payments without required principal repayment for a set period |
| Loan balance |
Generally does not decline from scheduled payments during the interest-only period |
| After the interest-only period |
The remaining balance generally begins amortizing over the years left on the loan |
| Investment-property availability |
Commonly associated with non-QM and other investor-focused programs |
| Interest rate |
Can be fixed or adjustable depending on the program |
| DSCR treatment |
Depends on the lender's qualifying-payment formula |
| Down payment and reserves |
Set by the underlying loan program |
Fannie Mae does not purchase mortgages with an interest-only feature.
That means an interest-only investment property loan generally sits outside standard Fannie Mae conforming financing.
It can instead appear among non-QM investment property options and other lender-specific programs.
How Interest-Only Works on an Investment Property
An interest-only mortgage usually has two stages.
First comes the interest-only period. You pay the interest due each month but are not required to pay principal.
Then the loan enters its amortizing period. The remaining balance must be repaid over the time left on the loan.
The CFPB notes that your payment can rise when the interest-only period ends even if the interest rate itself does not change.
Consider a hypothetical $400,000, 30-year mortgage with a 7% fixed rate and a 10-year interest-only period.
| Payment Stage |
Monthly Principal and Interest |
| 10-year interest-only period |
About $2,333 |
| 30-year fully amortizing payment from the start |
About $2,661 |
| Payment after 10 years of interest-only payments, amortized over remaining 20 years |
About $3,101 |
The rates and loan structure in this example are hypothetical and are not current loan terms.
The interest-only payment is about $328 lower than the fully amortizing payment at the beginning.
But if the $400,000 balance remains unchanged, the payment rises about $768 when the 10-year interest-only period ends and the balance begins amortizing over 20 years.
How Interest-Only Changes Rental Cash Flow
The lower initial payment can make a meaningful difference to monthly property cash flow.
Use the same hypothetical $400,000 loan at 7%.
Assume the property collects $3,400 per month in rent and has $600 per month in property taxes, insurance and other recurring housing costs.
| Monthly Cash Flow Example |
Interest-Only |
Fully Amortizing |
| Rent |
$3,400 |
$3,400 |
| Principal and interest |
$2,333 |
$2,661 |
| Other assumed housing costs |
$600 |
$600 |
| Cash flow before other operating expenses |
$467 |
$139 |
The interest-only structure improves monthly cash flow by about $328 in this example.
That extra cash flow is not free.
After 10 years of required interest-only payments, the scheduled loan balance would still be $400,000.
The fully amortizing borrower would have reduced the balance through monthly principal payments.
That distinction matters when evaluating rental income and investment-property cash flow.
Pairing Interest-Only With a DSCR Loan
Interest-only structures can also affect DSCR qualification.
A debt service coverage ratio compares qualifying rental income with the payment used by the lender.
If a lender's program permits the scheduled interest-only payment to be used in its DSCR calculation, the lower payment can produce a higher ratio.
Consider a property with $3,300 in qualifying monthly rent.
| Scenario |
Qualifying Rent |
Qualifying Payment |
DSCR |
| Higher amortizing payment |
$3,300 |
$3,474 |
0.95 |
| Lower interest-only payment |
$3,300 |
$2,870 |
1.15 |
The property income did not change.
The lower qualifying payment moved the ratio from 0.95 to 1.15.
Whether a lender actually calculates DSCR this way depends on its program. There is no universal rule requiring all DSCR lenders to qualify a loan using the interest-only payment.
The same lender-specific approach applies to DSCR loan requirements for credit, LTV and reserves.
Interest-only can also appear in financing for short-term rental properties, where seasonal cash flow can make the size of the required monthly payment particularly important.
Interest-Only and ARM Structures
An interest-only feature and an adjustable interest rate are separate parts of a mortgage.
A loan can have an interest-only period and also be an ARM.
That creates two different dates to track: when principal payments begin and when the interest rate can begin changing.
Those dates do not necessarily have to be the same.
For example, a loan might have a five-year fixed-rate period but a 10-year interest-only period.
In that structure, the rate could begin adjusting while the borrower is still making interest-only payments.
Later, the interest-only period would end and principal repayment would begin as well.
| Year |
Possible Loan Event |
| Years 1-5 |
Fixed rate and interest-only payments |
| Year 6 |
Rate can begin adjusting under the ARM terms |
| Years 6-10 |
Interest-only payment can change as the rate changes |
| Year 11 |
Principal repayment begins over the remaining loan term |
The exact structure depends on the mortgage.
That makes it important to understand both how the ARM adjusts and when the interest-only period ends.
A fixed versus adjustable rate can change the risk of an interest-only loan even when the initial payment is similar.
Borrowers comparing different fixed periods can also encounter materially different timelines with a 5/1 versus 7/1 ARM.
What Happens After the Interest-Only Period?
The payment does not normally remain interest-only for the full mortgage term.
Once the interest-only period ends, the remaining balance generally has to amortize over the remaining loan term.
That shorter amortization period is what creates the payment increase.
Return to the $400,000 example.
A 30-year loan with 10 years of interest-only payments has only 20 years left to repay the $400,000 balance when amortization begins.
At the same hypothetical 7% rate, principal and interest rises from about $2,333 to $3,101.
That is about a 33% increase in principal and interest.
An amortization calculation can show how much faster the balance has to be repaid once principal payments begin.
Recast and Payment Shock Risk
The payment increase at the end of the interest-only period should be part of the original loan decision, not something addressed when the date arrives.
The CFPB specifically cautions borrowers against assuming they will be able to sell or refinance before the higher payment begins.
Several things can disrupt that plan.
Mortgage rates could be higher.
The property might not appreciate as expected.
Rental income might remain flat or decline.
Your credit or finances could also change.
That means a refinance that appears reasonable when the property is purchased may not be available years later.
An ARM adds another layer of uncertainty because the interest rate itself can change.
An ARM risk calculation can help show how a higher rate would affect the payment before relying on refinancing as an exit.
Your Main Exit Options
An investor reaching the end of an interest-only period generally has three broad paths.
You can keep the loan and absorb the higher amortizing payment.
You can refinance if another loan is available and the economics make sense.
Or you can sell the property and pay off the mortgage.
| Exit |
Main Risk |
| Keep the loan |
Higher monthly payment can reduce or eliminate property cash flow |
| Refinance |
Future rates, property value, credit and loan availability are unknown |
| Sell |
The property's future value and marketability are uncertain |
None of those outcomes is guaranteed.
The loan should therefore be evaluated based on the payment and balance it could produce if the original exit plan does not work.
Down Payment and Reserve Requirements
Interest-only is a payment feature, not a separate universal underwriting program.
The required down payment comes from the underlying loan program.
For a non-QM investment-property loan, maximum LTV can depend on the lender, credit profile, property type and other factors.
That means there is no single investment property down payment that applies to every interest-only mortgage.
Reserve requirements are also lender-specific.
A lender can require borrowers to retain several months of payments after closing, particularly when the property has variable or seasonal rental income.
Those post-closing reserves are separate from the down payment and closing costs.
When Interest-Only Can Fit an Investment Strategy
An interest-only structure can be useful when the lower initial payment serves a specific purpose.
An investor planning substantial property improvements might prioritize cash flow during the renovation period.
A short-term holder may expect to sell before amortizing payments begin.
A seasonal rental may benefit from lower required payments while revenue is uneven throughout the year.
A portfolio investor might also use the structure to manage cash flow across several properties.
In each case, the benefit comes from delaying principal repayment rather than eliminating it.
When the Risk Can Outweigh the Initial Payment Benefit
Interest-only can be more difficult to absorb when the property's margins are already thin.
If the investment only produces acceptable cash flow because principal repayment is postponed, the post-interest-only payment deserves particular attention.
The structure can also be harder to manage when the borrower has limited reserves.
A first-time investor may have less experience estimating vacancy, repairs and property-level operating costs alongside the mortgage payment.
Long-term buy-and-hold investors also need to account for the fact that scheduled payments do not reduce the principal balance during the interest-only period.
The CFPB notes that the amount owed does not decline through interest-only payments.
Interest-Only vs. Fully Amortizing Investment Property Loans
| Feature |
Interest-Only Period |
Fully Amortizing Loan |
| Initial payment |
Lower when rate and balance are otherwise the same |
Higher because payment includes principal |
| Scheduled principal reduction |
None during interest-only period |
Begins with regular payments |
| Initial cash flow |
Potentially higher |
Potentially lower |
| Later payment risk |
Payment rises when amortization begins and may also change with an ARM |
Fixed-rate P&I remains level over the term |
| Ending balance after IO period |
Generally unchanged absent extra principal payments |
Reduced through amortization |
The lower initial payment is the main attraction.
The delayed principal repayment is the main tradeoff.
Bottom Line
An interest-only mortgage can be used for some investment properties, particularly through non-QM and other investor-focused programs.
The lower initial payment can improve cash flow and may improve DSCR under programs that use the scheduled interest-only payment for qualification.
But principal is not reduced through the required interest-only payments.
When the interest-only period ends, the remaining balance generally has to amortize over fewer years, which can produce a substantial payment increase even if the rate does not change.
The structure is most useful when that lower initial payment serves a defined investment strategy and the later payment has been stress-tested before closing.
FAQ
Can You Get an Interest-Only Loan on a Rental Property?
Yes. Some non-QM and other investor-focused programs offer interest-only mortgages on rental properties. Fannie Mae does not purchase mortgages with an interest-only feature, so these loans generally fall outside standard Fannie Mae conforming financing. Credit, LTV, reserves and property requirements vary by program.
Do Interest-Only Loans Help You Qualify for a DSCR Loan?
They can under some programs. If the lender uses the scheduled interest-only payment when calculating DSCR, the lower payment can increase the ratio. DSCR formulas are lender-specific, so an interest-only structure does not automatically improve qualification with every lender.
What Happens When the Interest-Only Period Ends?
The remaining principal generally begins amortizing over the years left on the loan. Because you have fewer years to repay a balance that may not have declined, the required monthly payment can rise substantially even if the interest rate stays the same.
Are Interest-Only Mortgage Rates Higher?
They can be priced differently from fully amortizing mortgages, but there is no universal rate premium. Pricing depends on the lender, loan structure, credit, LTV, property and market conditions. Compare the rate, points, fees and expected payment after the interest-only period.
How Long Can an Interest-Only Period Last?
The available period depends on the lender and mortgage program. Investment-property programs can offer different structures, including multiyear interest-only periods followed by amortization over the remaining term. Review the note carefully to identify exactly when principal payments begin and, for an ARM, when the rate can change.
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