Short Term Rental and Interest-Only option

[Keetaek Hong]

We are looking to acquire a Short-Term-Rental in AZ. From one of the lenders, we are seeing a favorable rate using ARM 7/6 IO-only (30yr amortization) option.

If I am willing to make a periodical lump sum payment during the high season of the rental, is there any downside to going IO-only option? 

[Andrew Garcia]

Hi @Keetaek Hong, there are a couple of downsides.

1. You are not paying down the principal balance so if you sell or refinance, the outstanding principal will be higher. Additionally, if there is a correction, you could be underwater.

2. The payments will increase dramatically once the interest-only period ends.

3. Generally, the rate is higher on IO loans.

I hope this helps! Let me know if I can be of any assistance.