Interest-Only Loans in Relation to the Freddie Mac SBL Program
Interest-only (I/O) loans consist of payments of only interest, and not principal. These loans are not amortizing, and do not decrease the unpaid principal balance (UPB) of a loan. Therefore, any equity gains during the term of an interest-only loan will occur as the result of property appreciation. I/O loans can be extremely beneficial to property investors, as they greatly increase cash flow and DSCR.
In addition to full-term interest-only financing, some loans offer shorter, interest-only periods, usually at the beginning of the term of a loan. This is the case for Freddie Mac Small Balance Loans, as they generally offer either, 1, 2, or 3-year I/O periods. The SBL program also offers full-term interest-only loans, though these loans have stricter LTV and DSCR requirements.