An interest-only mortgage allows you to pay only interest for a set period. After that, you begin paying principal and interest, resulting in higher monthly payments.
Key Characteristics
Initial period with interest-only payments
Later period includes principal + interest
Lower initial monthly payments
Can be fixed or adjustable
Loan Types
5-Year Interest-Only
Interest-only payments for first 5 years.
Higher payments begin year 6
Credit Score Requirements
Minimum Score:
700
Recommended: 720+ for favorable terms
PMI Impact: May require PMI if low equity
Down Payment Options
Minimum: 10%
Typical Range: 10%–20%
No PMI Threshold: 20% or more
Private Mortgage Insurance (PMI)
Required If: Under 20% equity
Cancellation Point: At 80% LTV
Cost Factors: Loan size and credit
Debt-to-Income Ratio
Typical Maximum: 43%
Higher income may be required
Documentation Requirements
Strong income verification
Assets and reserves
Good credit history
Loan Terms
Common Terms:
30 years
Rate Types: Fixed-rate , Adjustable-rate
Best For
Buyers with fluctuating income
Investors expecting high appreciation
Short-term affordability seekers
Pros
Lower initial monthly payments
Flexibility in early years
Can free up cash flow temporarily
Cons
Higher payments later
Risk of negative amortization
Not building equity early on
Summary
Interest-only loans can help buyers lower payments early on, but come with future risk of higher payments and slower equity building. Best for experienced or strategic borrowers.