Interest-Only vs Amortization Loan: Calculating Mortgage Payment
In today’s market it is important to find a loan not only flexible, but one that also helps you to create cash flow. Today we are going to compare interest-only loan vs amortization loan by using an example. This will paint a picture of how these two types of loans differ. Which is best for you? Let’s dive in and see!
What is the biggest difference between interest-only and amortization?
Interest only loan products are loans where you are only paying on the interest that is owed on the loan. The principal on these types of loans never goes down unless you decide to put a little money towards it. 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 will also have the principal added to the monthly payment.
Loan amount: $200K
DSCR ratio 1.1
|$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
|$1,333 Interest + principle = $1,468
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
|Will qualify for DSCR
|Will not qualify for DSCR
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.