Interest-Only Mortgages

An interest-only mortgage is a loan where scheduled payments cover only the interest for a set period. During that time, the payment does not reduce the loan principal unless the borrower chooses or is allowed to make additional principal payments.

The CFPB defines an interest-only mortgage as a loan with scheduled payments that require the borrower to pay only the interest for a specified amount of time.

Once the interest-only period ends, the loan typically becomes fully amortizing. That means the monthly payment may increase because the borrower must begin paying both principal and interest over the remaining loan term.

Important Considerations

Interest-only loans may provide lower initial payments, but they can involve significant future payment increases. During the interest-only period, your scheduled payment may not build equity through principal reduction. Equity may still change based on market value, additional principal payments, or other factors, but the regular interest-only payment itself does not reduce the loan balance.

nterest-only loans are not right for every borrower. It is important to understand the future payment, the remaining loan term, total cost, and whether your income and financial plan can support the payment after the interest-only period ends.

Who May Consider This Option?

Some borrowers with variable income, short-term ownership plans, or specific financial strategies may ask about interest-only loans. However, eligibility, availability, and suitability depend on lender guidelines, loan program requirements, property type, and the borrower’s complete financial profile.

Things to Avoid

Before choosing an interest-only mortgage, avoid assuming that refinancing will always be available later. Future rates, home values, income, credit, and lending guidelines can change.