An interest-only mortgage is an attractive option if you have a variable income because your initial monthly payments are usually lower.
What is an Interest-Only Mortgage?
When you have an interest-only mortgage, you pay just the interest for the first several years of the loan. Then the principal is amortized into the payment schedule after that initial period. At the end of the interest-only period, you also have the option to make a balloon payment or refinance and get a new loan.
How Does an Interest-Only Mortgage Work?
Interest-only loans are typically structured as a 3/1, 5/1, 7/1, or 10/1 adjustable-rate mortgage (ARM), meaning you would pay interest only for 3, 5, 7, or 10 years. After that period, you would begin paying principal and interest, and the mortgage rate may change as the market changes. Fixed-rate interest-only loans are also available, but they’re not as common.
How Long Does an Interest-Only Mortgage Last?
Interest-only loans last as long as any other loan—typically 15 or 30 years. The only difference is that you’ll pay interest for a period of time and then both principal and interest for the rest of the loan period.
Types of Interest-Only Mortgage Loans
- 3/1 Interest-Only ARM
- 5/1 Interest-Only ARM
- 7/1 Interest-Only ARM
- 10/1 Interest-Only ARM
- Fixed-Rate Interest-Only Loan
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We would like to thank Jeff Aguilera for the time and knowledge he provided my wife and I with a very smooth transition in the purchasing of our house. Our real estate agent Emily suggested we go with Jeff and he did not disappoint. So thank you very much, again Jeff. It was a true pleasure working with you.
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Other Rate Options
A fixed-rate mortgage keeps the same interest rate throughout the life of the loan (i.e., 15 or 30 years).
The interest rate adjusts to current market rates during set periods throughout the life of the loan.
A borrower pays only the interest rate for a certain loan term period, typically for the first few years.
Monthly payments start at a set amount and gradually increase over the life of the loan.