Fixed-Rate vs. Interest-Only Mortgage

Because its balance shrinks every month. Interest is charged on the outstanding balance, so as principal falls, each month's interest charge falls with it. The interest-only loan keeps its full balance the whole time, accruing interest on the original amount for longer.

The higher fixed payment is buying down the very balance that generates future interest.

It fits borrowers who prioritize cash flow now and have a clear exit, such as selling or refinancing before the interest-only period ends, or who expect to invest the payment difference at a higher return.

It also suits irregular-income earners who will pay principal in lump sums. For long-term owners wanting steady equity, the fixed loan is usually stronger.

Not from your payments during the interest-only period, since none of that money reduces principal. Your only equity gain in that phase comes from your home rising in value, which is not guaranteed.

Once the loan begins amortizing or you make voluntary principal payments, equity from paydown starts to accrue, but that is later and larger than the fixed loan's steady build.

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A fixed-rate loan builds equity from day one with a steady payment; an interest-only loan starts cheaper but builds no equity and jumps later. Unless you have a clear short-term plan, the fixed-rate loan is the safer choice — compare both above.