Alpine Mortgage
(201) 488-8809

Interest Only Mortgage

Interest only mortgages can be a useful tool for managing finances but carry a degree of risk due to the potential for significantly higher future payments. They are best suited for borrowers who have a clear understanding of their future income trajectory and those who can manage the larger future payments.

Interest Only Mortgage

What is an Interest Only Mortgage?

An interest only mortgage is a type of home loan where, for a set period at the beginning of the loan term, the borrower pays only the interest on the principal balance, with the principal balance remaining unchanged. This initial interest only phase typically lasts from 5 to 10 years, after which the loan reverts to a standard amortizing mortgage where payments include both principal and interest. This shift results in higher monthly payments once the interest only period ends. Interest Only loans are offered on fixed rate or adjustable rate loans.

How Interest Only Loans Work

In an interest only mortgage, the monthly mortgage payments during the interest only period do not reduce the loan principal. Instead, they cover only the interest charge on the loan. This results in lower initial payments compared to traditional mortgages where payments are split between interest and principal reduction. When the interest only period concludes, the payments increase significantly as the borrower begins to pay down the principal on the loan, often amortized over the remaining term of the mortgage. The longer the interest only period, the larger the new payment will be when the interest only period ends.

The Benefits of an Interest Only Mortgage

Interest only mortgages offer several benefits

  • Lower Initial Payments. By only paying the interest for the first few years, borrowers can save significant amounts, which can be useful for managing budget constraints or investing the savings elsewhere.
  • Flexibility. Borrowers can choose to make principal payments during the interest-only period if they wish, but they are not obligated to do so.
  • Cash Flow Management. This type of mortgage can be beneficial for people with irregular incomes or those who expect their earnings to increase significantly in the future.

Who is an Interest Only Mortgage Best For?

Interest only mortgages are particularly suited for certain types of borrowers:

  • High-income Earners. Those who have substantial but irregular income might benefit from the lower payments during the interest-only period and can use surplus funds to pay down the principal when they are able.
  • Investors. Real estate investors may prefer this type of loan to maximize cash flow from rental incomes which can then be funneled back into property investments or other areas.
  • Future Income Growth. Borrowers who anticipate a significant increase in income, such as medical residents or start-up entrepreneurs, might find the initial lower payment schedule matches their financial growth trajectory.

Interest Only Mortgage FAQs

Usually a credit score of 620 is needed for an interest only mortgage program.

The interest rate on an interest only mortgage will vary vs a fully amortized mortgage. For a customized rate quote on an interest only loan, please contact us.

Yes, they can be riskier as they depend on future income increases or property values rising. Borrowers must be prepared for higher payments once the interest-only period ends.

Qualification criteria for an interest only mortgage can be stricter than for a standard mortgage. Lenders often require a higher credit score, a larger down payment, and proof of substantial assets or income. If you would like to get pre-approved for an interest only mortgage, you can apply online.