Interest-only stretch versus an amortizing payment
Same idea of a commercial loan. The split is whether principal is due while the loan is outstanding. No rate is shown because the lender's rate is not ours to print.
| Interest-only stretch | Amortizing payment | |
|---|---|---|
| Monthly check | Interest on the balance | Interest plus principal |
| Principal during that stretch | Stays outstanding | Declines |
| If the term ends first | The full balance is still due | A remaining balance is still due whenever the term is shorter than the amortization |
| Question to ask | Does coverage use this smaller payment? | Does coverage use the payment that starts later? |
Sponsors ask for interest-only when they want a smaller check while a lease rolls, a unit renovation finishes, or a new Arizona building is still filling up. The payment is interest on the balance. Principal does not amortize in that window, so the balance the lender will want at the end is not shrinking. A fully amortizing loan is a different payment, on the Arizona permanent loan page.
The length is not a statewide rule. One lender may allow interest-only for part of a five- or seven-year term and then require amortization. Another may allow it for the whole short term and take the full balance as a balloon. A third may refuse it on a stabilized building. Ask which of those the quote actually is before you compare payments. We arrange the file from Scottsdale. We do not publish a coupon, a maximum number of interest-only years, or a promise that a given program will offer the feature.
Investor-owned income property is the file this page is about: apartments of five or more units, and other commercial buildings with a rent roll. An owner who occupies a shop or a warehouse can still be a commercial conversation. A loan on a house is not.
Why the smaller payment can mislead the coverage test
Debt service coverage divides net operating income by the annual payment. An interest-only payment is smaller than an amortizing payment at the same rate, so the ratio looks stronger. Some lenders still size the loan on the payment that begins when amortization starts, or on both payments. Some use only the interest-only check. That choice changes proceeds. It is a question for the term sheet, not a formula we can finish here.
You can see the two payments with numbers you type. The amortization calculator has an interest-only switch and shows the balance still due. The DSCR calculator divides income by whichever payment you are testing. Neither tool is a quote. A plain-language note on what people mean by a workable ratio is what is a good DSCR.
Where an Arizona interest-only request usually sits
On a stabilized building, interest-only is a feature inside a permanent loan, if that capital source offers it. Life companies, banks, CMBS, and agency apartments each have their own rule, and the rule can change with leverage and the remaining lease term. We will not say which box 'usually' grants full-term interest-only. Bring the rent roll and ask.
On a building that is not stabilized, the smaller payment often shows up inside bridge or a short loan after construction. Those are not permanent loans with a long amortization hiding inside them. If the plan is to hold the property for a decade once it is leased, say that. The takeout is a separate approval. Forcing interest-only onto a permanent quote the lender will not write wastes a season.
Refinancing into interest-only does not erase the note you already have. Prepay, a yield-maintenance formula, or defeasance can cost more than a year of payment savings. Read that section before you shop the new structure. The statewide refinance page is Arizona commercial refinance.