An interest-only mortgage allows borrowers to make monthly payments that cover only interest for a specified period of time. After the interest-only period ends, the loan converts to a fully amortizing payment schedule that includes both principal and interest.
Interest-only options may be available on certain fixed-rate and adjustable-rate mortgage programs, subject to lender guidelines and eligibility requirements.
Because principal is not reduced during the interest-only period, borrowers do not build equity through monthly payments during that time unless additional principal payments are made.
Borrowers are qualified based on the fully indexed rate or the introductory rate (whichever is greater), and on a payment amount that will fully amortize the loan over the remaining term once the interest-only period ends. Qualification is not based solely on the initial interest-only payment.
When the interest-only period expires, monthly payments will increase because the remaining loan balance must be repaid over a shorter period of time. Borrowers should carefully evaluate long-term affordability, income stability, and financial goals before selecting this type of loan.
Interest-only mortgages may be appropriate for borrowers with variable income, short-term ownership plans, or specific financial strategies. However, these programs are not suitable for every borrower.
Eligibility, terms, and availability vary by lender and are subject to underwriting approval.