Interest Only Mortgages

How It Works

An interest-only loan has two stages. During the interest-only period, often 5, 7 or 10 years, your required payment covers only the interest. Your loan balance doesn't go down unless you choose to pay extra.

When the interest-only period ends, the loan converts to a regular amortizing loan. You'll start paying both principal and interest over the remaining term. Because you're paying off the full balance in fewer years, your payment can rise sharply.

Here's a simple example. On a $600,000 loan, the interest-only payment is based on interest alone. After a 10-year interest-only period on a 30-year loan, you'd repay the full $600,000 over the remaining 20 years, which means a noticeably higher monthly payment than a standard 30-year loan would have had from day one.

Many interest-only loans are also adjustable-rate loans, so the rate may change too. Some are fixed. Always ask which kind you're getting.

During the interest-only years, you're usually free to pay extra toward principal whenever you like. Any extra payment lowers your balance, which lowers your future interest-only payments too. This flexibility is one of the main reasons business owners like these loans.

Who Uses It

Interest-only loans are usually a niche product, most often offered as jumbo or non-QM loans. They're typically used by:

• High earners with variable income, like business owners or commissioned professionals, who want a low required payment and pay down principal when bonuses arrive
• Real estate investors focused on cash flow
• Buyers who plan to sell or refinance before the interest-only period ends
• Financially disciplined borrowers who would rather invest the difference than pay down the mortgage quickly

Interest-only loans are not designed to stretch a budget so you can afford more house than you otherwise could. If the only way a home works is with an interest-only payment, that's a sign to step back and look at other options. Used wisely, though, they can free up cash for investments, business growth or other priorities while you still own the home you want.

Risks

• Payment shock. Your payment can jump when principal payments begin.
• No equity from payments. During the interest-only years, your equity only grows if the home's value rises or you pay extra.
• Market risk. If home values fall, you could owe more than the home is worth, making it hard to sell or refinance.
• Higher total interest. Because the balance stays high longer, you'll usually pay more interest over the life of the loan.
• Rate risk if the loan is adjustable.

I only recommend an interest-only loan when there's a clear, realistic plan for the future, like a known income event or a planned sale.

Qualifying

Because these loans carry more risk, lenders set a higher bar. Expect requirements like (as of 2026, subject to change):

• Credit scores of roughly 700 or higher
• A down payment of 20% to 30% or more
• Significant cash reserves, often 12 months or more of payments
• Qualifying based on the fully amortizing payment, not just the interest-only payment
• Full documentation of income and assets

If you're curious whether an interest-only loan could fit into your broader financial plan, let's talk. We'll model it next to a standard loan so you can see the full picture.