Discover Your Best Option: DSCR Loan – Interest Only vs Amortized

Today we are going to discuss DSCR interest only products and compare them to an amortized loan. Our goal is to not only look at the flexibility of an interest only loan, but to also demonstrate how it will help with cash flow. Which is best for you? Let’s start by comparing an interest only loan vs an amortized loan. 

What is interest only DSCR?

Interest only loan products are loans where you are only paying on the interest that is owed on the loan. However, principal on these types of loans never goes down unless you decide to put a  little money towards it. One thing to keep in mind with DSCR loans is that there are prepayment restrictions for the first 3 to 5 years. In most cases this means that you have a 20% cap during this prepay period. Paying a little extra doesn’t normally create an issue. It is just something that you need to keep in mind when working with an interest only loan.  

What is an amortized loan?

An amortized loan on the other hand requires you to pay not only the interest, but a little bit towards the principal as well. In this market, the rates are a little bit higher than they have been in years past. While an amortized loan typically has lower rates, it is important to keep in mind that the principal payment will be added to the monthly payment. In many cases the monthly payment for the amortized loan will end up being greater than the interest only loan. This difference can affect your ability to qualify for the loan because the property will not be a cash flowing investment. 

Example:

Loan amount: $200K

Rent: $1,700

DSCR ratio 1.1 

Loan Type	Rate	$200,000 x rate = annual interest	Annual interest ÷ 12 = monthly payment	Payment amount to mortgage company	Taxes, Insurance, HOA, and Flood = $150.00  Creating Grand total for the month
Interest Only	8.25%	$16,500	$1,375	$1,375	$1,525
Amortized	8%	$16,000	$1,333	$1,333 Interest + principle = $1,468	$1,618

One more step. Adding the DSCR ratio.

What you will normally find is that the interest only rates in this market will be a little higher than the amortized loan rate. However, we still have one more step before we can determine if you can qualify for the DSCR loan on this property. We will need to multiply the grand total for the month by the DSCR ratio. This will help us to determine if the property will qualify for a DSCR loan based on the current rent amount of $1,700. Just as a reminder, the rents are based on what is happening in the market and the assessments done by an appraiser.

DSCR ratio 1.1	Grand total for the month	Grand total for the month x 1.1 =	Difference after adding the  DSCR ratio compared to the $1,700 rent
Interest only	$1,525	$1,677.50	Will qualify for DSCR
Amortized	$1,618	$1,779.80	Will not qualify for DSCR

With DSCR loans you will have the flexibility of a 5, 7, or 10 year period. A DSCR interest only loan also provides an excellent opportunity for you to cash flow on the property. 

If you have any questions or want to run though the DSCR numbers, contact us today. We can help you compare a DSCR loan to an amortized loan. This will help you determine which is a better fit for your needs. 

Watch our most recent video to Discover Your Best Option: DSCR Loan – Interest Only vs Amortized.