Interest-Only Mortgage
Interest-only mortgages let you pay just the interest for 5-10 years, resulting in lower initial payments. After the IO period, payments increase to include principal. Ideal for strategic borrowers who understand the trade-offs.
Program Details
Key Benefits
- Lower initial payments
- Cash flow flexibility
- Principal payments optional during IO period
- Available on jumbo and investment loans
- Pairs with ARM options
Program Tags
Who It's Best For
- High-income professionals expecting income growth
- Real estate investors maximizing cash flow
- Borrowers with irregular income (bonuses, commissions)
- Those planning to sell or refinance before IO period ends
- Buyers who want lower initial payments to invest the difference
Advantages
- Lower monthly payments during IO period
- Frees up cash for other investments
- Flexibility—make principal payments when you want
- Maximizes cash flow for rental properties
- Interest may be tax-deductible (consult tax advisor)
- Good for borrowers with irregular income (bonuses)
- Helpful for high earners expecting income growth
Considerations
- •Payments increase significantly after IO period
- •No equity built during IO period (unless home appreciates)
- •Higher total interest paid over life of loan
- •Not available with most conforming loan programs
- •Requires discipline and financial sophistication
- •Can be risky if home values decline
- •Must qualify for fully amortizing payment on some programs
Eligibility Requirements
- Strong credit (typically 700+)
- Significant assets or reserves
- Stable, verifiable income (or bank statements/DSCR)
- Usually requires 20%+ down payment
- Clear exit strategy (sale, refinance, or ability to handle higher payments)
Additional Requirements
- Higher credit scores than standard programs
- Larger down payments (typically 20%+)
- Greater reserves (6-12+ months)
- Documentation of income and assets
- Understanding of payment increase after IO period
Pro Tips
- Model the payment increase before committing—payments can jump 30-50% or more after IO period
- Interest-only doesn't mean interest-free—you can still make principal payments when convenient
- Consider IO for investment properties to maximize cash flow and tax deductions
- Pair IO with an ARM for lowest initial payment—but understand both risks compound
- Have a clear exit strategy: will you sell, refinance, or handle the higher payments?
- IO can be smart if you invest the payment savings in higher-returning assets
- IO jumbo loans are common and competitive—don't assume you can't get one
Also Known As
For an initial period (typically 5-10 years), you pay only interest—no principal. After the IO period, the loan converts to fully amortizing payments over the remaining term. Payments increase significantly at conversion.
IO payments are typically 20-30% lower than fully amortizing payments. For example, on a $500,000 loan at 7%, IO payment might be ~$2,917/month vs. ~$3,327/month fully amortizing—saving $410/month during the IO period.
Your payment converts to principal plus interest, amortized over the remaining term. This can increase payments by 30-50% or more. On a 30-year loan with 10-year IO, you'd pay off principal over just 20 years after conversion.
Yes! Interest-only is the minimum payment, not the maximum. You can pay extra toward principal anytime. This gives flexibility—pay minimums when cash is tight, pay more when you have extra.
Most IO programs require 700+, with some allowing 680+. Higher scores get better rates. IO loans are considered higher risk, so underwriting standards are stricter than standard programs.
IO loans carry more risk because you're not building equity and face a payment increase later. However, for the right borrower—strong finances, clear strategy, financial discipline—they can be a smart tool. The key is understanding what you're signing up for.
IO works well for: high-income professionals early in their careers, real estate investors maximizing cash flow, borrowers with irregular income (bonuses), those planning to sell before IO ends, or sophisticated borrowers who invest the savings elsewhere.
Yes! IO is popular for investment properties because it maximizes cash flow. DSCR loans commonly offer IO options. Lower payments improve your cash-on-cash return and may help you qualify for more properties.
IO fixed-rate loans maintain the same interest rate throughout. IO ARMs have an initial fixed period (e.g., 5 years), then adjust annually. IO ARMs often have lower initial rates but add rate-change risk on top of the IO payment increase.
Yes, many borrowers plan to refinance before the IO period ends to avoid the payment increase or lock in a new IO period. Just ensure you have equity, good credit, and favorable rates when you want to refinance.
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Typical Documents
- Last 30 days of pay stubs or income docs
- Last 2 years W-2s or 1099s (as applicable)
- Most recent 2 months of bank statements
- Government-issued ID
Exact items vary by program and scenario.
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Information provided is for educational purposes only and is not a commitment to lend. All loans subject to underwriting approval. Rates and terms subject to change. Equal Housing Lender. Equal Housing Opportunity.