Interest-only mortgages: interest first, principal later
Reviewed by the Editorial Team · Updated October 18, 2026 · 9 min read
An interest-only mortgage lets you pay only the interest for an initial period, commonly 5 to 10 years, so the balance never moves. After that the loan recasts and the full balance is repaid over the years that remain. Most are non-QM or portfolio loans.
Key takeaways
An interest-only mortgage charges only interest for an initial period, commonly 5 to 10 years, so the balance stays at the original loan amount.
On a $400,000 loan at 7.18%, the payment is $2,393 for ten years, then $3,145: a $752 jump with the full balance still owed.
Over 30 years the example costs $66,360 more interest than the same loan amortized from day one ($641,960 against $575,600).
Interest-only loans are non-QM or portfolio products, so lenders commonly want a score of 680–700, 15–30% down and 3–12 months of reserves, and they test you on the recast payment.
Interest-only period
Commonly 5 to 10 years
Payment after recast
$2,393 to $3,145 a month
Loan type
Non-QM or portfolio
Down payment
Often 15–30%
30-year fixed average7.18%Freddie Mac PMMS · Nov 5, 2026. Interest-only loans usually price above it.
Payment jump in year 11+$752/moOn $400,000: $2,393 interest-only → $3,145. See both loans ↓
How an interest-only mortgage works
For the first stretch of the loan, each payment covers only the interest charged that month, so the balance never moves. When the interest-only period ends, the loan recasts: the same balance is repaid with principal and interest over the years that remain.
Interest-only period: commonly 5, 7 or 10 years
Payment: loan balance times the annual rate, divided by 12
After the period: payments recast to principal plus interest
Loan type: non-QM or portfolio, since QM rules bar interest-only
Many interest-only loans are also adjustable-rate mortgages, so the rate can move on top of the recast. A few end in a balloon instead of a recast. A HELOC draw period follows the same interest-only-then-repay pattern.
How the payment is calculated
Multiply the balance by the annual rate and divide by 12; nothing is set aside for principal. The table uses a round 7% rate to show how that compares with a fully amortizing 30-year payment at three loan sizes.
Monthly principal and interest at a round 7% rate, before taxes and insurance
How the payment is calculated
Loan amount
Interest-only
30-year amortizing
Principal skipped
$300,000
$1,750
$1,996
$246
$500,000
$2,917
$3,327
$410
$1,000,000
$5,833
$6,653
$820
Paying principal during the interest-only years
Many lenders allow extra principal payments at any time, and each one reduces the balance that future interest is charged on. Confirm there is no prepayment penalty, and ask whether your payment drops after a large paydown or stays the same until the recast.
What the lower payment really costs
Take a $400,000 loan with a 30-year term and 10 years interest-only, priced at 7.18% in both versions. That rate is illustrative: it matches the Freddie Mac 30-year fixed average, and interest-only loans usually price higher. Using one rate isolates what the structure itself costs.
Worked exampleA $400,000 loan: 10 years interest-only vs fully amortizing at 7.18%
What the lower payment really costs
Loan
Years 1–10
Years 11–30
Total interest
Interest-only for 10 years
$2,393 interest only
$3,145 +$752
$641,960
Fully amortizing 30-year
$2,710
$2,710
$575,600
Payment jump in year 11+$752from $2,393 to $3,145 a month, with the full balance still owed
Extra interest over 30 years$66,360vs the same loan amortized from day one, at the same rate
Illustrative rate equal to Freddie Mac's 30-year fixed average (7.18%, Nov 5, 2026); interest-only loans are non-QM and usually price higher. Principal and interest only. Model your own loan
The interest-only borrower pays $2,393 a month for ten years against $2,710 on the amortizing loan. In year 11 the payment becomes $3,145, up $752, because the untouched $400,000 must now be repaid over 20 years instead of 30.
Over 30 years the interest-only loan costs $641,960 in interest against $575,600, which is $66,360 more. The extra comes from ten years of interest charged on the full balance instead of a shrinking one.
A deferral, not a discount
The lower payment moves cost into the future rather than removing it. In this example the deferral adds $66,360 in interest, so it pays off mainly if the freed-up cash earns more elsewhere or you sell before the recast.
What the lower payment leaves out
The monthly figure hides costs that come with a non-QM loan. Ask each lender to put these four in writing before you compare quotes:
Larger down payment: 15–30% versus a 3% minimum on conventional loans
Cash reserves: 3–12 months of payments held after closing
Prepayment penalty: some loans charge a fee for early payoff
When an interest-only mortgage goes wrong
The first payment is rarely the problem. The trouble starts in year 11, when the recast arrives and one of these four things can break an otherwise sound plan:
Payment shock: $752 more a month at the recast, with income unchanged
No equity from payments: the balance stays at $400,000 for ten years
Falling prices: a drop can leave you owing more than the home's worth
No guaranteed exit:refinancing or selling may not work when you need it
The CFPB advises against assuming you can sell or refinance when the payment rises. Regulation Z adds a safeguard on consumer home loans: lenders must test your ability to repay using fully amortizing payments over the years left after the interest-only period — $3,145 here, not $2,393.
Name your exit before you sign
Write down how the recast gets paid: higher income, a planned sale, or principal prepaid to shrink it. Then test year 11 at $3,145 a month, and consider sending part of the $752 gap toward principal each month starting now.
Interest-only vs. fixed-rate vs. ARM vs. balloon
The four structures differ in what they postpone and when the bill arrives. Interest-only delays principal, an adjustable-rate loan lets the rate change, and a balloon leaves the remaining balance due on one date.
Interest-only next to its nearest alternatives
Interest-only vs. fixed-rate vs. ARM vs. balloon
Interest-only
30-year fixed
ARM
Balloon
Payment in the early years
Interest only: $2,393 in the example
Principal and interest: $2,710 in the example
Fixed for an initial period, then can reset
Calculated on a longer schedule than the loan term
Balance over time
Flat during the interest-only years
Shrinks from the first payment
Shrinks, unless it is an interest-only ARM
Shrinks slowly; much is still owed at the due date
What changes later
Payment recasts higher: +$752 here
Nothing; the payment stays level
The rate, and the payment, can rise or fall
The remaining balance comes due at once
Qualified Mortgage?
No: non-QM or portfolio
Can be, when it meets the QM rules
Can be, when it meets the QM rules
No, apart from limited small-creditor loans
Fits best
Variable income, short holds, investors
Long stays that need a level payment
A planned sale or refinance within the fixed period
These loans suit borrowers whose income is lumpy or whose ownership will be short. The common thread is a reliable plan for the balance, not just a low payment today.
Commission or bonus earners with large, irregular payouts
Buyers who expect to sell before the recast
Investors who value monthly cash flow over equity
Households with income set to rise before the recast
Skip it if you need a level payment for 30 years, or if the interest-only payment is the only thing that makes the home affordable. A budget that works at $2,393 but not at $3,145 is a warning sign, not a plan.
Interest-only mortgages: pros and cons
Pros
Lower payment during the interest-only years
Frees cash for other priorities
Fits bonus-heavy or irregular income
Extra principal usually allowed at any time
Cons
No equity from payments for years
Payment recasts higher, +$752 in the example
$66,360 more interest than amortizing in the example
Fewer lenders, stricter terms and higher rates
What lenders look for
Because they cannot be Qualified Mortgages, interest-only loans come from jumbo lenders, portfolio banks and non-QM specialists rather than standard agency programs. Most want a credit score of 680–700, 15–30% down and 3–12 months of reserves.
Higher scores and larger down payments usually earn better pricing, since the lender carries more risk with no principal paydown. Ask each lender for its recast terms, any rate caps and its prepayment rules before you compare quotes.
Requirements at a glance
Credit score of 680–700 or higher, depending on the lender
Down payment of 15–30% of the purchase price
3–12 months of payments in cash reserves after closing
Income documented to cover the full recast payment, not just interest
A non-QM, portfolio or jumbo lender, since agency programs don't offer it
A written plan for when the interest-only period ends
You pay only the interest for an initial period, commonly 5 to 10 years, so the balance stays the same. Then the loan recasts and you repay principal and interest over the years left. On a $400,000 loan at 7.18%, the payment goes from $2,393 to $3,145.
How much is a $300,000 mortgage at 7% interest?
Interest-only, a $300,000 loan at 7% costs $1,750 a month: the balance times the rate, divided by 12. The same loan fully amortized over 30 years costs about $1,996 in principal and interest, before taxes and insurance. The $246 gap is the principal you skip during the interest-only period.
How much is the monthly payment on a $1,000,000 interest-only mortgage?
At a 7% rate, a $1,000,000 interest-only loan costs about $5,833 a month, before taxes and insurance. A 30-year loan that amortizes from day one runs about $6,653 at the same rate, so interest-only saves roughly $820 a month at first.
After a 10-year interest-only period, the recast payment over the remaining 20 years is higher than both.
What happens when the interest-only period ends?
The loan recasts: the full balance is repaid with principal and interest over the years that remain. In our example the payment rises $752, from $2,393 to $3,145, because $400,000 must now be repaid in 20 years. Some loans instead come due as a balloon, so confirm which yours is.
Can you pay principal during the interest-only period?
Usually yes. Many interest-only loans let you make extra principal payments at any time, and each one lowers the balance on which future interest is charged.
Check the note for a prepayment penalty, which can appear on non-QM loans, and ask whether the payment resets after a large paydown.
Are interest-only mortgages a good idea?
Only with a clear plan for the recast. They can fit bonus-heavy earners, short-term owners and investors, but they build no equity through payments and cost more interest overall: $66,360 more in our $400,000 example.
If you would struggle at the higher payment, a fully amortizing loan is safer.
Are interest-only mortgages still available?
Yes, but they are niche. Interest-only loans cannot be Qualified Mortgages under CFPB rules, so you will find them as non-QM, portfolio or jumbo loans at a limited set of lenders, not in FHA, VA or standard agency programs. Expect stricter credit, down payment and reserve rules.
What credit score and down payment do you need for an interest-only mortgage?
Lenders commonly ask for a credit score of 680–700, a down payment of 15–30% and 3–12 months of cash reserves. Terms vary because each lender sets its own rules outside the Qualified Mortgage box.
You will also be qualified on the recast payment, not the lower interest-only payment.
Can you refinance out of an interest-only mortgage?
Often yes, but it is not guaranteed. A refinance into a fully amortizing loan requires you to qualify on your income, credit and home value at that time, and the balance will not have shrunk unless you prepaid.
The CFPB warns against assuming you can refinance when the payment rises, so plan an alternative.
Is an interest-only mortgage cheaper than a regular mortgage?
Cheaper each month at first, but not overall. In our example the interest-only payment is $2,393 against $2,710 for the amortizing loan, yet total interest is $641,960 against $575,600.
The structure adds $66,360 over 30 years, and real interest-only loans usually carry higher rates too.
This guide is general information, not a lending decision. Program rules and dollar limits change — verify current figures with a licensed lender and confirm licensing at NMLS Consumer Access. See all loan types.
Nothing matches that. Try “refinance”, “FHA”, “Texas”, “Rocket” or “PMI”.