30-year fixed
- Payment you must make, years 1–10
- Interest and principal
- Payment the lender qualifies you on
- The 30-year payment on the whole loan
The standard amount
Income needed to qualify
For uneven, seasonal or bonus income
Interest-Only Mortgage
Pay only the interest for the first 10 years, keep your cash working, and pay down the balance when the big checks come in.
- Up to $3M
- Loan amount
- 700+
- Credit score
- 20–25%
- Down payment
- 10 years
- Interest-only
How it works
A lower required payment, and you choose when to pay down the balance
The most common structure I use is a 40-year fixed-rate loan, so the rate never changes. For the first 10 years, your required payment covers only the interest, so the balance stays where it started unless you choose to pay it down. In year 11, the loan switches to regular payments that cover interest and principal (the amount you borrowed), paying it off over the last 30 years.
Think of it as a way to manage cash flow, rather than a way to buy more house. It fits borrowers whose income arrives in big, uneven pieces, such as a business owner with a busy season, an executive paid a large bonus, or an owner waiting on the sale of a business. You keep the required payment low in the lean months and send extra money to principal when the big checks land.
Interest-only payments are one of the features the federal “qualified mortgage” rules don’t allow, so every interest-only home loan is a non-QM (non-traditional) loan. Non-QM loans are held by banks or private investors instead of being sold to Fannie Mae and Freddie Mac, and their rates usually run about 1% to 2% higher than a traditional loan. In my experience, adding interest-only costs a little more on top of that, about a quarter to a half percent more on the rate.
Many big banks don’t offer interest-only home loans, or offer them only to their private-banking clients. As a mortgage broker, I can shop interest-only programs from many lenders and pair them with the way you prove your income, whether that’s tax returns, bank statements, a profit and loss statement, your savings or a rental’s rent.
How lenders qualify you
Interest-only lowers your payment, not the income you need
Many buyers expect a lower payment to mean a bigger loan. On a home you live in or a second home, it doesn’t. Federal ability-to-repay rules make the lender qualify you on the full payment that starts after the interest-only years, figured on the whole loan.
40-year, first 10 years interest-only
- Payment you must make, years 1–10
- Interest only
- Payment the lender qualifies you on
- A 30-year payment on the whole loan, from year 11
About the same, or a little more
Income needed to qualify
You need about the same income, or a little more because interest-only usually has a slightly higher rate. The difference is how much you must pay in the first 10 years, and how much cash stays in your hands.
Qualifying rule from 15 U.S.C. 1639c and 12 CFR 1026.43(c)(5). A 30-year loan with 10 interest-only years is qualified over the last 20 years, which needs more income.
Side by side
Interest-only or a 30-year fixed?
Both loans can be paid down early. The difference is how much you are required to pay in the first 10 years, and what that flexibility costs.
30-year fixed
- Required payment
- Principal and interest from month one
- Balance after 10 years
- Paid down by every payment
- Payment change
- None, it stays the same
- Cost
- A lower rate than interest-only
Choose this if your income is steady and you want the least total interest and no payment change.
40-year, 10 years interest-only
- Required payment
- Interest only for the first 10 years
- Balance after 10 years
- Only what you choose to pay down
- Payment change
- Rises in year 11; the less you owe, the smaller the jump
- Cost
- About a quarter to a half percent more on the rate
Choose this if your income comes in big or uneven pieces, or you plan to sell or pay down a large amount within 10 years.
Bottom line
Interest-only works best for disciplined borrowers with a plan for the balance, whether that’s yearly paydowns, a coming sale or a planned move. It works worst as a way to stretch into a home the full payment can’t support.
Real math
Three buyers who chose interest-only for different reasons
An executive who plans to move again, a sales director who expected interest-only to stretch her budget, and a business owner waiting on a sale.
Scenario 1 · A planned move
Relocating executive buying a $1.4M home in Denver
Her company moved her to Denver for what she expects to be about seven years. She is putting 25% down and would rather keep her cash invested than pay down a home she plans to sell.
Income inputs
- Home price
- $1,400,000
- Down payment
- 25%
- Plans to sell in
- About 7 years
- Interest-only years
- 10
Qualifying result
3 years
Of interest-only time left when she plans to sell
Her required payment stays interest-only for her whole stay, and the payment increase in year 11 never reaches her if she sells on schedule. The money she would have sent to principal stays in her investment account.
Watch for: With no principal paid, her equity comes only from her down payment and any rise in the home’s value. Her 25% down is her cushion if prices are flat when she sells.
Scenario 2 · The qualifying rule
Sales director pricing a $1.5M home in Austin
She earns a base salary plus commission, and she hoped interest-only would let her stretch past her budget on a $1.5 million home with 20% down.
Income inputs
- Salary and commission (two-year average)
- $420,000 a year
- Home price
- $1,500,000
- Loan amount
- $1,200,000
- Payment used to qualify
- The full payment after year 10
Qualifying result
$35,000/mo
Qualifying monthly income, the same on either loan
The lender counts the same $35,000 a month and tests it against the full payment on $1.2 million, so interest-only doesn’t raise her price range. It lowers the payment she must make while her commissions build during the year, and she can pay down principal after her strongest quarters.
Watch for: Commission income needs a two-year history, and lenders average it. If her commissions dropped last year, the lower number is the one they use.
Scenario 3 · A business sale
HVAC company owner buying a $1.6M home in Tampa
He has signed an early agreement to sell his company in about two years and plans to stay on to run it after the sale. He qualifies today on 12 months of business bank statements and puts 25% down, for a $1.2 million loan.
Income inputs
- Loan amount
- $1,200,000
- Expected sale
- In about 2 years
- Planned paydown after the sale
- $700,000
- Interest-only years left after the sale
- About 8
Qualifying result
$500,000
Balance after the sale paydown
Interest-only keeps his required payment low while the deal closes. On most programs, once he pays down $700,000, his interest-only payment is figured on $500,000 from then on, which cuts it by more than half without a refinance.
Watch for: The lender qualifies him on his income today, not on the sale. If the sale falls through, he still needs to afford the full payment that starts in year 11.
Get my options
Thinking about interest-only? Tell me your plan.
Three quick taps and an optional note. I read every one myself and tell you whether interest-only fits, usually the same day.
What are you looking to do?
How do you earn most of your income?
When would you like to buy or close?
Optional. A sentence or two about your situation helps me come to our call prepared.
Where should I reach you?
Your answers are already filled in below, so I’ll know your situation before we talk.
Rather just talk?
Calculator
See your interest-only payment and what happens in year 11
Enter the price, your down payment and an example rate. Add the extra principal you expect to pay each year to see your balance when the interest-only years end and your payment after that.
Interest-only payment to start
$0
Loan amount $0 · taxes and insurance not included
- Same loan as a 30-year fixed, same example rate
- $0
- Difference each month at the same rate
- $0
- Balance when the interest-only years end
- $0
- Payment from year 11
- $0
- Payment you qualify on (your home or a second home)
- $0
The rate is an example. Interest-only usually costs a quarter to a half percent more on the rate than a 30-year fixed, so the real difference is smaller. Extra principal is counted once a year. Rental loans that qualify on the rent usually use the interest-only payment. Interest-only on the programs I access goes up to $3M.
Who this is for
The borrowers interest-only fits best
These borrowers usually earn well, and their income arrives in big pieces or they have a clear plan for the balance within 10 years.
Seasonal business owners
Boat and RV dealers, pool builders, landscapers and tax preparers earn most of their year in a few busy months. Interest-only keeps the payment low in the slow season.
Executives and sales leaders
When a large share of your pay comes as a yearly bonus or commission, you can pay the minimum all year and send the bonus to principal.
Owners expecting a sale
If you plan to sell your business or another asset, interest-only can bridge the time until the money arrives and the big paydown happens.
Buyers planning to move
Relocations, move-up plans and second homes you may sell within 10 years can be held on interest-only, so the payment stays interest-only for as long as you own them.
Real estate investors
Rental loans that qualify on the rent usually use the interest-only payment, which can help the rent cover it. See my rental loan page, where you qualify on the rent.
Buyers who want their cash working
If your money earns more invested in your business or your portfolio than it saves in mortgage interest, interest-only leaves more of it there.
The 40 years, step by step
What happens to your payment over the life of the loan
For the first 10 years, your required payment is only the interest on what you owe. If you never pay extra, you will owe the same amount in year 11 that you borrowed. If you pay extra, the balance drops, and on most programs your interest-only payment drops with it.
In year 11 the payment resets: the lender spreads whatever you still owe over the 30 years left. That payment includes principal for the first time, so it is higher than the interest-only payment. The less you owe by then, the smaller the jump.
How a 40-year interest-only loan works
- Years 1–10 Interest only The balance stays put unless you pay extra
- Any time Pay extra Extra principal lowers the balance and, on most programs, your payment
- Year 11 Payment resets What you owe is spread over the last 30 years
- Year 40 Paid off Or sell or refinance any time before
No prepayment penalty on your home
Because this is a non-QM loan, federal rules don’t allow a prepayment penalty when it’s on your home or a second home. You can pay down, sell or refinance whenever you like. Rental loans often do carry one.
Pay down on your schedule
Extra principal can go in any month. Mark it as principal so it lowers the balance instead of paying next month in advance.
Plan for year 11
Set a target balance for year 10. If you reach it, the payment that starts in year 11 can be close to the interest-only payment you started with.
Requirements
What interest-only borrowers typically need
Interest-only programs are stricter than standard non-QM loans. These are typical across the programs I can access.
- Credit score
- 700+
- 680 can work on some programs with more down
- Down payment
- 20–25%
- More on some second homes, rentals and larger loans
- Loan size
- Up to $3M
- Larger loans usually need more down
- Interest-only years
- 10
- Usually a 40-year loan; some programs use 30 years
- Reserves
- About 6 months
- Savings left after closing; retirement and business accounts can often count
- First-time buyers
- Often not eligible
- Many programs require that you have owned a home before
What you owe in year 11 on a $1.2M loan
- $1,200,000 No extra principal
- $700,000 $50,000 extra a year
- $200,000 $100,000 extra a year
It works for buying, refinancing and cash-out on primary homes, second homes and rentals.
Checklist
What to send me first
You’ll need
- Your last two years of tax returns or W-2s, so I can see which way of proving income fits you best
- The last two months of statements, all pages, for every account your down payment and savings come from
- A list of every property you own, with the mortgage, taxes and insurance for each
- A copy of your driver’s license or passport, plus your signed purchase contract when you have one
Nice to have
- 12 months of bank statements, if you are self-employed and your returns come up short
- Your last two years of bonus or commission statements, if a large part of your pay comes that way
- A letter of intent or sale agreement, if you plan to pay down the loan after selling a business or property
- Your plan for the balance, such as yearly paydowns or a move date, so we can set a target for year 10
Who this loan fits
A Lake Norman boat dealer who could pay down his loan after each summer
- About $2M, lakefront
- Home
- $1.5M, 25% down
- Loan
- 40 years, 10 interest-only
- Structure
- $100K to principal each fall
- Plan
Here’s the kind of business owner I see interest-only help most. He has run a boat dealership on Lake Norman for 15 years. From April through August the showroom can’t keep boats in stock, and from November through February it barely covers payroll. After write-offs for inventory, the building and equipment, his tax returns show far less than the business brings in, and his bank account swings hard from one season to the next.
He is buying a $2 million lakefront home with 25% down, a $1.5 million loan. Twelve months of business bank statements capture every season, so a bank statement loan would count what the business actually brings in. Adding a 40-year interest-only structure would keep his required payment low through the winter.
Every September, after the summer rush, he plans to send about $100,000 to principal. If he keeps that up, he would owe about $500,000 when the interest-only years end, a third of what he borrowed, and the payment that starts in year 11 would be figured on that smaller balance.
Before you choose interest-only
When interest-only isn’t the right answer
Interest-only costs a little more and asks for a plan. These are the situations where something else usually wins.
-
Your income is steady
If you are paid the same amount every month, a 30-year fixed gives you a lower rate, no payment change and a balance that shrinks on its own.
-
You are trying to buy more house
Interest-only won’t raise your price range on a home you live in or a second home. If your tax returns are holding you back, a bank statement loan may count more of your income.
-
You have less than 20% to put down
Most interest-only programs need 20% to 25% down. With less, a loan with full payments is usually the better fit.
-
Your only plan is that prices rise
With no principal paid, a flat or falling market can leave you with little equity when you sell or when year 11 arrives.
FAQ
Interest-only mortgage questions
For a set time, usually the first 10 years, your required payment covers only the interest. Most interest-only loans I do have a fixed rate, so the rate never changes. During those years the balance doesn’t go down unless you pay extra. After that, the loan switches to principal and interest and is paid off over the years left, usually 30 on a 40-year loan.
Your payment is reset. Whatever you still owe is spread over the remaining years, and your payment rises because it now includes principal. The less you owe by then, the smaller the increase. You can also sell or refinance before then.
Yes. You can pay extra any time, and on most programs your next interest-only payment drops with the balance.
Not on a home you live in or a second home. Federal ability-to-repay rules require the lender to qualify you on the full payment that starts after the interest-only years (12 CFR 1026.43). Rental loans that qualify on the rent usually use the interest-only payment, so it can help there.
Yes. Interest-only payments fall outside the federal qualified mortgage rules, so these are non-QM (non-traditional) loans. Non-QM rates usually run about 1% to 2% higher than a traditional loan, and interest-only adds about a quarter to a half percent more on the rate in my experience.
Most interest-only programs I access want 700+ credit and 20% to 25% down, for loans up to $3 million. Some allow 680 with more down. Many don’t allow first-time buyers.
Some do, often only for their private-banking clients. As a mortgage broker, I can shop interest-only programs from many lenders and match them with the way you prove your income.
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In their words
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Keep reading
Related articles and programs
- Mortgage Tips Are Adjustable-Rate Mortgages a Good Idea Right Now? Here's the Math
- Bank Statement Loans The Complete Bank Statement Loan Guide for Self-Employed Borrowers
Sources
- CFPB: What is a qualified mortgage?
- 15 U.S.C. 1639c: minimum standards for residential mortgage loans
- eCFR: 12 CFR 1026.43, ability-to-repay and qualified mortgage rules
Program terms are typical ranges across the programs I can access and can change. Not a commitment to lend. Dale Corley, mortgage broker, NMLS #1547543.
Want a lower payment while you build toward a bigger paydown?
Tell me how your income comes in and what you plan for the balance, and I’ll show you whether interest-only fits and what your payment looks like in year 11.
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