An interest-only mortgage is a type of loan where you only pay the interest on the principal amount for a specified period, typically at the beginning of the loan term.
Unlike traditional mortgages — where you pay both principal (the original loan amount) and interest from the start — with an interest-only mortgage you’re only responsible for covering the interest costs for a set duration.
Interest-only mortgages are typically a jumbo loan product used to purchase high-end homes priced above the lending limits set by Fannie Mae and Freddie Mac. They are usually structured as adjustable-rate mortgages (ARMs), although some lenders offer them as fixed-rate loans as well.
Interest-Only Mortgage Rates
In the current lending environment, interest-only loans have become a rarity offered by a limited number of lenders — a shift reflecting the broader market’s preference for traditional loan structures.
As a result, the rate chart below focuses on adjustable-rate mortgages (ARMs) as a more accessible and comparable alternative. These rates serve as a useful benchmark until interest-only rates become more widely available.
| Product | Rate | APR |
|---|---|---|
| 5/6 Jumbo Arm (purchase) | 5.90% | 5.92% |
| 7/6 Jumbo Arm (purchase) | 6.09% | 6.11% |
| 10/6 Jumbo Arm (purchase) | 6.30% | 6.32% |
| Product | Rate | APR |
|---|---|---|
| 5/6 Jumbo Arm (purchase) | 5.90% | 5.92% |
| 7/6 Jumbo Arm (purchase) | 6.09% | 6.11% |
| 10/6 Jumbo Arm (purchase) | 6.30% | 6.32% |
How we source rates and rate trends
Rates will vary significantly from lender to lender depending on the borrower’s qualifications. The better your credit score, the larger your down payment, and the more financial reserves you have, the more likely lenders will offer you their best interest-only mortgage rates.
How Does an Interest-Only Mortgage Work?
When you use an interest-only mortgage to buy a home, you typically have 5–10 years where you only make interest payments. After that, you begin making payments toward the loan principal as well. Many borrowers choose to refinance once the interest-only period ends rather than face the higher fully amortized payments.
These loans can be attractive initially because the monthly payments are lower during the interest-only period. However, they become more expensive once principal repayment begins — and can result in higher overall costs than a traditional loan where you pay both principal and interest from the start.
Other Types of Interest-Only Home Loans
An interest-only mortgage doesn’t have to be used to buy a home. In fact, the most popular type of interest-only loan is the home equity line of credit (HELOC). A HELOC allows existing homeowners to borrow money using their home as collateral.
HELOCs are typically structured as interest-only loans during the draw period — the initial phase, usually lasting 5–10 years, during which you can borrow against the credit line up to a predetermined limit.
You’re only required to pay the interest charges during the draw period, though you can make payments against the loan principal at any time if you choose.
Interest-only mortgages are also commonly used for construction loans, which cover the cost of building a new home. In these situations, a buyer takes out an interest-only loan to cover the cost of land, materials, contractors, and related expenses. The loan is then structured to convert to a regular, fully amortizing loan once construction is complete and the owner takes possession.
Who Is an Interest-Only Mortgage Good For?
Many high-net-worth borrowers — especially those not interested in long-term homeownership — frequently opt for an interest-only mortgage. Rather than tying up large amounts of capital in an expensive home, they invest it elsewhere. The lower monthly payments allow them to do that while still benefiting from any increase in home value when it comes time to sell.
Since interest paid on up to $750,000 in mortgage debt is generally tax-deductible for loans originated after December 15, 2017, high-income borrowers using an interest-only home loan may be able to write off a significant portion of their housing costs.
Another candidate for an interest-only mortgage is someone with substantial but irregular earnings — such as a small business owner or a commissioned salesperson who receives the bulk of their income in bonuses or lump sums. For this type of borrower, an interest-only mortgage allows for minimal monthly payments during lean periods, with larger principal payments made when income allows. They’re still paying off the loan — just in irregular steps.
How to Qualify for an Interest-Only Mortgage
Borrowers must be well-qualified to be approved for these loans. Because interest-only mortgages are typically jumbo products outside of conventional Fannie Mae and Freddie Mac guidelines, lenders set their own standards — and they tend to be strict. Most interest-only mortgage lenders require credit scores of 720–740 or higher. A sizable down payment is also standard — sometimes 30% or more, though some lenders may accept 20% or less. As with any mortgage, it pays to shop around.
Income requirements are similar to those for other mortgage types. Lenders want to see a debt-to-income (DTI) ratio of 43% or lower. Unlike during the housing bubble, you can’t qualify based solely on your ability to cover the interest payments — you must qualify based on your ability to cover the fully amortized payment (principal and interest) once the interest-only period ends.
Lenders will also typically require demonstrated financial reserves sufficient to cover fully amortized mortgage payments for a set period — ranging from a few months up to two or three years, depending on the lender.
Considering a refinance or exploring your home equity options? Refi.com specializes in helping homeowners find the right loan for their situation. See how much equity you can access or start your application with Refi.com today.
