Interest-Only Periods on Apartment Loans: How They Work and What They Cost
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An interest-only (IO) period is the part of an apartment loan's term when the borrower pays only interest and no principal. The payment is lower, so cash flow and the debt service coverage ratio (DSCR) look stronger. When the IO period ends, the loan starts amortizing and the payment rises: on a $7,000,000 loan at 6.0% with a 30 year schedule, it goes from $420,000 to about $503,600 a year, a jump of about 20%. Because no principal is repaid during the IO years, more of the loan is still owed when the building sells or refinances.
This post is part of our guide to real estate syndication. It works through one loan with three IO choices. Figures are as of November 2026; the rate is an illustration, not a quote.
How much lower is an interest-only payment?
Take a $7,000,000 loan at 6.0% on a building with $650,000 of NOI. The figures are an example.
| Payment type | Yearly payment | DSCR (NOI ÷ payment) | Cash flow after the loan |
|---|---|---|---|
| Interest only | $420,000 | 1.55x | $230,000 |
| Amortizing, 30 year schedule | $503,622 | 1.29x | $146,378 |
The IO payment is about $83,600 a year lower. On $3,000,000 of investor equity, that difference alone is about 2.8 percentage points of cash-on-cash return. That is why projections with IO debt show higher distributions in the early years.
What happens when the IO period ends?
The payment steps up to the amortizing amount on the date in the loan documents. Nothing about the building changes that day, so the higher payment has to come from higher NOI. In the example, if NOI is still $650,000 when IO ends, distributions fall by about $83,600 a year and DSCR drops from 1.55x to 1.29x.
If the lender also tests DSCR for a cash sweep or a reserve trigger, the drop can push the loan into one; see cash sweeps and DSCR triggers. On floating rate loans, the step-up can coincide with a higher rate, which compounds the jump; see interest rate caps on floating rate loans.
What to check: the month IO ends, the amortization schedule that starts then (30 years from that date, or the remaining years of an original schedule), and the projected NOI in that month compared with the amortizing payment.
How does IO change the balance at sale?
On a 10 year loan of $7,000,000 at 6.0%, the balance owed at year 10 depends on how many IO years there were:
| Structure | Balance at year 10 | Principal repaid |
|---|---|---|
| Full-term IO (10 years) | $7,000,000 | $0 |
| 5 years IO, then 30 year amortization | $6,513,805 | $486,195 |
| Amortizing from day 1, 30 year schedule | $5,858,001 | $1,141,999 |
Every dollar not repaid is a dollar less in sale proceeds for the investors. IO moves money from the sale to the early distributions. Neither is wrong; it is a trade-off the sponsor should explain. Our post on what happens when a syndication sells shows how the payoff comes out of the sale price.
When does IO make sense?
- Value-add plans. Lower payments while units are being renovated and income is temporarily down.
- Short holds. If the plan is to sell or refinance before the IO period ends, the principal paydown would have been small anyway.
- Low leverage. Lenders often allow longer IO on lower loan-to-value loans, where the risk is smaller.
IO is weaker when it is the only reason the deal shows acceptable distributions. If a deal works only during the IO years, it does not work.
How lenders decide on IO
Lenders size IO loans with their own tests, which often include an amortizing DSCR even when the payment is IO, and they may require lower leverage or a higher DSCR for more IO years. Fannie Mae and Freddie Mac publish program terms that include IO options, and banks set their own. Ask each lender in writing for: the number of IO months, the DSCR they test at, and whether the IO period depends on leverage or on reaching a target. For how DSCR, loan-to-value and debt yield combine to set the loan amount, see how lenders size an apartment loan.
How DoorRaise fits in
DoorRaise does not lend or arrange loans. It helps sponsors raise the equity on top of the loan from their friends and followers, for apartment buildings with 5 or more units, and computes the deal page's projections from the sponsor's inputs, including the loan payments. DoorRaise forms the deal's LLC, prepares the offering documents, files Form D and verifies every investor's accreditation, in 506(b) and 506(c) deals. Investors fund by wire into escrow at Enterprise Bank & Trust, and distributions are quarterly by default. DoorRaise charges two flat fees: $1,500 to set up (non-refundable) and $5,000 a year for administration, the first year paid at closing from the money raised and only if the deal closes.
Run your loan with and without IO in the free cap rate and DSCR calculator, then start your deal.
FAQ
What is an interest-only period on a commercial loan?
It is a set number of months at the start of the loan when the borrower pays only interest. After it ends, payments include principal on an amortization schedule.
How long are interest-only periods on apartment loans?
They range from none to the full loan term, depending on the lender, the program and the leverage. Partial IO periods of a few years on a 10 year loan are common; ask each lender for its terms.
Does an interest-only loan improve DSCR?
Yes, while the IO period lasts, because the payment is lower. Many lenders also test DSCR on an amortizing payment, so IO does not always increase the loan amount.
Is an interest-only loan riskier?
It raises the risk at the end of the IO period, when the payment rises, and at sale, when more of the loan is owed. The risk is manageable if the plan reaches a NOI that covers the amortizing payment in time.
How do I calculate an interest-only payment?
Multiply the loan amount by the yearly interest rate. A $7,000,000 loan at 6.0% has a $420,000 yearly IO payment, or $35,000 a month.
Sources
- Fannie Mae Multifamily, fixed-rate mortgage loans
- Freddie Mac Multifamily, fixed-rate loan term sheet
- Fannie Mae Multifamily Selling and Servicing Guide
This article is general information, not legal, tax or investment advice. The example loan and rate are illustrative. DoorRaise is not a lender, law firm, broker-dealer, investment adviser or funding portal.