An interest-only mortgage lets you pay just the interest on your loan for an initial period—giving you lower monthly payments upfront but bigger ones later.
As someone who’s helped dozens of buyers navigate tricky mortgage choices, I know how tempting these loans can be. But I also know how risky they get when the real costs kick in. Here’s what you need to understand before signing that dotted line.
How Does an Interest-Only Mortgage Work?
An interest-only mortgage is a type of home loan where, for the first 3 to 10 years, you only pay the interest owed on the loan—not the principal. Once that period ends, your payments increase significantly because you start repaying both interest and principal. Many of these loans are adjustable-rate mortgages (ARMs), meaning your interest rate (and thus your payment) could go up or down over time.
Example: You take out a $400,000 mortgage with a 10-year interest-only period. For the first 10 years, you only pay interest—say $1,667/month at 5%. In year 11, you must start paying off the $400,000 plus interest, pushing your monthly payment potentially over $3,000.
Source: Consumer Financial Protection Bureau
Key Advantages of Interest-Only Mortgages
Lower Initial Payments
For the first few years, your payments are much smaller compared to traditional mortgages. This can ease cash flow and make higher-priced homes temporarily affordable.
Flexibility in Early Years
You can choose to pay down principal if you want—and doing so early lowers future payments and helps build equity faster.
Potentially Lower Intro Rates
Interest-only ARMs often start with lower rates than fixed loans, giving you a short-term advantage if rates hold or decline.
Major Risks to Watch Out For
Payment Shock After Intro Period
Once the interest-only phase ends, your monthly cost may double. If your income hasn’t grown, this can lead to serious financial stress.
No Equity Growth Early On
You won’t build equity unless home values rise or you make extra payments. This could leave you vulnerable if you need to sell early.
Market-Driven Rate Surprises
Most interest-only loans are ARMs—if interest rates rise, your payments will too, even during the interest-only phase.
Balloon Payments
Some loans require the full unpaid balance in one lump sum at the end. That can be financially devastating if you’re not prepared.
Stat: According to the Mortgage Bankers Association, interest-only mortgages accounted for just 2% of new loans in 2023—a sign of their niche, high-risk nature.
Who These Loans Are (and Aren’t) For
Best for:
- Real estate investors and flippers
- High-income earners with variable cash flow
- Buyers expecting big income jumps
Avoid if:
- You’re a first-time buyer with tight finances
- You plan to stay long-term in the home
- You dislike payment uncertainty
Expert Advice Before You Apply
Run a stress-test scenario: Can you afford a 50-100% payment increase after the interest-only phase?
Ask your lender if early principal payments are allowed: Not all loans offer this flexibility.
Don’t bank on rising income or home values: These loans only work if your projections pan out—otherwise, you’re stuck.
Interest-Only vs. Traditional Mortgage: Quick Comparison
| Feature | Interest-Only Mortgage | Traditional Mortgage |
| Monthly Payment (early years) | Lower | Higher |
| Equity Growth | Slower (none without extra) | Steady with each payment |
| Interest Rate Type | Often Adjustable | Fixed or Adjustable |
| Payment Predictability | Low | High (if fixed-rate) |
| Suitability | Short-term owners/investors | Long-term buyers |
Quick Topic Explainer: Interest-Only Loans
How does an interest-only mortgage work?
You pay just the interest for the first 3–10 years, which keeps payments low. After that, you must repay both principal and interest, causing your monthly payment to rise significantly.
Final Take: Think Long-Term
Interest-only mortgages can help in niche situations, but they’re rarely a smart long-term strategy for most buyers. If you’re not confident about your future income, it’s safer to stick with a traditional mortgage and build equity from day one.