When deciding between DSCR interest-only vs amortized loans, it’s important to know the difference and how each option impacts your cash flow and long-term goals. Both types of loans have pros and cons, so let’s break them down.

What is an Interest-Only Loan?

With an interest-only loan, you pay just the interest on the loan for a set period. This means your monthly payments are lower during the interest-only phase. However, after that phase ends, you’ll need to start paying down the principal, which increases your payment amount.

Example:

Imagine you take out a loan for $100,000 with an interest-only period of 5 years at 5% interest. During that time, you’ll pay $417 per month. Once the 5 years are over, you’ll start paying the principal, so your payment will jump higher.

Pros:

• Lower monthly payments at the start.
• More cash flow for other investments or expenses.
• Flexibility if you plan to sell or refinance before the principal payments kick in.

Cons:

• No reduction in the loan balance during the interest-only period.
• Payments can jump significantly after the interest-only phase.
• If the property doesn’t increase in value or if you don’t sell, you could be stuck with a higher payment.

What is an Amortized Loan?

With an amortized loan, you pay both the interest and a portion of the principal from the beginning. This means your monthly payment stays the same, and over time, more of your payment goes toward reducing the loan balance.

Example:

Let’s say you have the same $100,000 loan with a 5% interest rate, but it’s amortized over 30 years. Your payment would be about $537 per month. While that’s more than the interest-only loan, each month you are paying down the loan, and your balance decreases steadily.

Pros:

• Steady payments that stay the same over time.
• You build equity in the property right away.
• Lower total interest costs over the life of the loan.

Cons:

• Higher payments upfront compared to an interest-only loan.
• Less cash flow for other investments or expenses.

Which Option is Best?

The best option depends on your strategy and goals. Here’s how to decide:

• Short-Term Strategy (Interest-Only): If you’re planning to hold the property for a short time, or if you need maximum cash flow now, interest-only might be the way to go. You get lower payments upfront and can use that extra money for other investments. But be careful! When the interest-only period ends, your payments will go up.
• Long-Term Strategy (Amortized): If you’re in it for the long haul, an amortized loan makes more sense. You’ll build equity over time and won’t face a big payment jump later. It’s a safer bet if you plan to hold onto the property and want to slowly pay off the loan.

Final Thoughts

Choosing between interest-only vs amortized loans depends on your situation. If cash flow is tight and you expect to sell or refinance soon, interest-only might work better. But if you want stability and long-term equity, an amortized loan is usually the safer choice.

Now that you understand the difference, you can pick the loan that fits your goals best!