What Is Interest-Only Mortgage?

An interest-only mortgage is a home loan where you pay only the interest for an initial period, typically 5 to 10 years, without reducing your loan balance. After that period ends, your payments jump to include both principal and interest over the remaining term. These loans offer lower initial payments but carry the risk of significantly higher payments later.

On a $400,000 interest-only loan at 6.5%, your monthly payment during the interest-only period would be $2,167. Once the interest-only period ends after 7 years, the remaining $400,000 balance amortizes over 23 years, raising your payment to approximately $2,894—a $727 per month increase with no equity built during the first 7 years.

Key Facts

• Interest-only period: Typically 5–10 years
• Payment increase after reset: 25%–50% higher than the interest-only payment
• Equity built during interest-only period: $0 (unless home appreciates)
• Common borrower profile: High-income buyers, investors, or those expecting income growth

Frequently Asked Questions

Do you build any equity with an interest-only mortgage?

You do not build equity through payments during the interest-only period because none of your payment goes toward the loan balance. However, you may gain equity if your home’s market value increases during that time.

Who typically uses interest-only mortgages?

Interest-only loans are popular with real estate investors, self-employed borrowers with variable income, and buyers who plan to sell before the interest-only period ends. They are less common for traditional homebuyers because of the payment shock risk.