Interest Only Loans
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An interest-only loan is a type of mortgage where the borrower only pays the interest on the principal balance for a specified period, typically the initial years of the loan. During this time, payments are lower since they do not include principal repayment. After the interest-only period ends, the borrower must start paying both principal and interest, often resulting in higher monthly payments. These loans are suited for borrowers expecting increased income or planning to sell the property before the principal payments begin.
How Interest-Only Loans Work?
Payments
With an interest-only loan, the monthly payment only covers the interest, not the principal. This results in lower monthly costs during the interest-only period.
Principal
The principal balance remains unchanged during the interest-only period. Borrowers must pay off the full principal amount when the loan matures.
Term
Interest-only loans typically have a 30-year term, with the first 5-10 years being interest-only, followed by a fully amortizing period.
How to qualify for a Interest-Only Loans
- Lenders often require a good to excellent credit score (typically 720 or higher) to qualify for interest-only loans.
- Demonstrating a stable and sufficient income to comfortably make interest payments during the interest-only period is crucial.
- Lenders may require a larger down payment (often 20% or more) to mitigate risk associated with interest-only loans.
- A low debt-to-income ratio, ideally below 43%, shows lenders that you have enough income to cover all monthly expenses.
- Providing evidence of financial stability, including savings, investments, and a history of managing credit responsibly, strengthens your application.
Advantages of Interest-Only Loans
1
Lower Payments
The interest-only payments are significantly lower than a traditional mortgage, making them more affordable in the short term.
2
Flexible Budgeting
The lower payments provide more flexibility to allocate funds towards other financial goals during the interest-only period.
3
Potential Tax Benefits
The interest paid on an interest-only loan may be tax-deductible, providing additional savings.
Calculate Your Payments
Use our Payment Calculator to estimate your monthly mortgage payment. You can input a different home price, down payment, loan term and interest rate to see how your monthly payment changes.
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