In a nutshell, a home loan is an investment tool that allows you to leverage your home in a manner that generates cash flow.
In a home loan, the bank (also known as the lender) lends you money to help you purchase a piece of property. Then, you pay back your loan with interest. Although home loans can help you finance bigger and better properties, they require good credit, a stable income, and a good amount of money to cover closing costs.
Today, let’s take a closer look at one of the many types of loans you can get—DSCR loans. Here’s what you need to know:
What is a DSCR Loan?
DSCR stands for Debt Service Coverage Ratio. This type of loan is also an Interest-Only (IO) loan. It is one of the most popular loans amongst investors.
The rationale behind an IO loan is that it allows you to borrow a larger sum than you would otherwise. At the same time, it requires you to pay a smaller amount each month, allowing you to build equity faster.
The key features of a DSCR loan are:
- You are generally required to put down only 20% of the value of the property
- The loan has a fixed rate
- The loan interests only
- You will have a loan term of 5 to 15 years
- The loan is amortized, meaning that you pay down the loan balance over time
A DSCR loan is generally used to purchase a commercial property; the loan value is typically 90% to 95% of the purchase price.
How Does a DSCR Loan Work?
To understand how a DSCR loan works, you first need to know that a commercial loan is always amortized. This means that the loan balance will reduce over time. The loan balance is reduced monthly by a fixed amount until it is completely paid off.
The loan balance, which is the principal, the interest, and all the accrued fees, is then paid back to the lender at the end of the loan term. The payment, which is an amount that covers the principal and the interest, increases each month. Because of that, it’s very likely that you will pay a higher amount each month.
In an IO loan or DSCR loan, you do not need to make principal payments on a monthly basis. You only make interest payments. As mentioned, these interest payments are generally tax deductible. However, you need to be careful not to overpay taxes.
The Benefits of a DSCR Loan
The biggest advantage of a DSCR loan is that it allows you to buy a property that might be out of your reach if you use a different loan. Another advantage is that you can buy as many properties as you want—this is one of the main reasons this loan is so popular amongst investors.
Another advantage is that all the interest is tax-deductible. Your lender will send you a Form 1098-E each year. This form will show how much interest you paid over the course of the year.
The Bottom Line
DSCR loans are ideal for investors who want to purchase a commercial property. However, you need to ensure you can cover the required monthly payments on your loan. If you cannot afford your monthly payment, you should not take out the loan.
If you are looking for reliable North Palm Beach mortgage lenders, you’re in the right place. At America’s Mortgage Solutions, our mission is to help you buy your home as soon as possible. As your home loan experts in North Palm Beach, FL., we are dedicated to ensuring your home purchase or refinance experience is smooth, seamless, and stress-free. Contact us today at (561) 316-6800 to learn more and get started!
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