Interest-Only Mortgage
Pay only interest for an initial period, with full payments beginning later.
Overview
An interest-only mortgage allows borrowers to pay only the interest portion for an initial period (typically 5-10 years), significantly reducing monthly payments. After the interest-only period ends, the loan converts to a fully amortizing mortgage with higher payments that include principal. These loans are popular with high-income borrowers, self-employed individuals with variable income, and investors. They do not build equity through payments during the interest-only period.
Min. Down
20-30%
Min. Credit
720
Term
30 (5-10 year IO period) yr
PMI
No
Best For
- High-income professionals with variable income
- Real estate investors
- Borrowers expecting significant income growth
- Self-employed with irregular cash flow
Pros
- Significantly lower initial payments
- Maximum cash flow flexibility
- Can invest the payment difference
- Useful for irregular income earners
- Available in jumbo amounts
Cons
- No equity buildup during IO period
- Payment shock when IO period ends
- Higher total interest over loan life
- Stricter qualification requirements
- Risk of owing more than home is worth
- Limited lender availability
Requirements
- Minimum 720 credit score
- Large down payment (20-30%)
- Significant cash reserves (12+ months)
- Proof of ability to make full payments
- Maximum 40% DTI typically
- Extensive income documentation