Interest-Only (I/O)

An interest-only period is a stretch of the loan term — sometimes the whole term — during which the borrower pays only the interest accruing on the balance and none of the principal. Payments are lower, but the loan balance does not shrink. I/O is standard on construction and bridge loans (where the property isn’t producing stabilized income yet) and is often offered for the first one to three years of a permanent loan as a sweetener.

The borrower trade-off is cash flow now versus balance later. I/O boosts in-place cash-on-cash returns and helps a property in lease-up carry its debt, but every I/O month is a month of amortization you don’t get back — at maturity the balloon is bigger, and the refinance has to clear a higher hurdle. Lenders price this risk: full-term I/O generally requires lower leverage or stronger DSCR.

When a lender in our coverage quotes I/O availability — "up to 24 months I/O for stabilized industrial," for example — it appears in that lender’s observed-terms module with the date it was quoted.