NerdWallet solicits information from reviewed lenders on a recurring basis throughout the year. All lender-provided information is verified through lender websites and interviews. We also utilized 2021 HMDA data for origination volume, origination fee, average interest rate and share-of-product data. For inclusion on this roundup, lenders must score a 4.5 or above according to our overall methodology and offer interest-only loans. An interest-only mortgage is a niche product that can be difficult to find these days. See NerdWallet's picks for some of the best interest-only mortgage lenders in 2023.

• The interest rates are comparable with what you might find with a conventional loan, but because you’re not paying any principal, those initial payments are much lower.
• From covering medical bills to paying for home renovations to even purchasing travel, online loans may be available to help individuals split large payments into smaller installments.
• Borrowers can pay off the loan faster, but they don't realize the benefit until the end of the loan period.
• Refinance your existing mortgage to lower your monthly payments, pay off your loan sooner, or access cash for a large purchase.
• But you’ll pay more in overall interest — plus, since interest-only loans aren’t qualified mortgages, there can be stricter requirements to qualify.

During the amortization phase, the payment structure is similar to a conventional mortgage in that the interest portion of your payment gradually goes down over time as the principal portion increases. With an “interest-only ARM,” you make interest-only payments at a fixed interest rate during the loan’s introductory period. Once the introductory period concludes, you must pay interest and principal for the remainder of the loan at the market rate, which can fluctuate up or down. An interest-only mortgage is a type of home loan in which the borrower only pays the interest on the loan for a specified introductory period. After this interest-only period concludes, the borrower must pay both interest and principal for the remainder of the loan term.

Defining Interest-Only Mortgages

If you opt for an interest-only loan instead of a conventional home loan, you must be prepared for the end of the interest-only term. Once the term is over, your monthly financial responsibility increases. If you don’t have a plan in place to cover this higher monthly payment, you may default on your mortgage. It’s rare that your home’s value appreciates throughout this time period to offset the additional payments you made in interest.

• If you want a monthly payment on your mortgage that’s lower than what you can get on a fixed-rate loan, you might be enticed by an interest-only mortgage.
• After the interest-only period, you can refinance or pay off the loan or start making monthly payments of both principal and interest.
• For example, if you take out a $100,000 interest-only ARM at five percent, with an  interest only period of 10 years, you’d have to pay about $417 per month (only towards the interest) for the first 10 years.
• Most mortgages require you to pay both interest and principal each month.

For borrowers who want to buy an investment property or keep their monthly payments low for a set period, an interest-only loan could be a good option. However, there are trade-offs that come with those initial lower payments. Most interest-only loans are structured as an adjustable-rate mortgage (ARM) and the ability to make interest-only payments can last up to 10 years.

Pros of interest-only loans

Private lenders offer interest-only conventional and jumbo home loans, and these are usually structured like ARMs. We believe everyone the 10 best payroll software for small business in 2021 should be able to make financial decisions with confidence. Most mortgages require you to pay both interest and principal each month.

Mortgages

That means if you have a 10/1 ARM, for instance, you would pay interest only for the first 10 years. An interest-only mortgage allows you to pay just the interest and no principal with each monthly payment, usually for the first five, seven or 10 years of the loan term. An interest-only mortgage can make it more affordable to own a home for a few years. Since it initially doesn’t require you to make payments toward the principal, your monthly payment will be less.

Risks

This means your monthly payment can increase more based on the fluctuations in the adjustable-rate market. With most loans, your monthly payments go toward both your interest costs and your loan balance. Over time, you keep up with interest charges and gradually eliminate the debt owed. That only works if the borrower plans to make the higher payments after the introductory period. For example, some increase their income before the intro period is over.

Interest-only loans aren’t necessarily bad, but they’re often used for the wrong reasons. If you have a sound strategy for using the extra money (and a plan for getting rid of the debt), they can work well. There were many types of subprime loans based on the interest-only model. Most of these were created after 2000 to feed the demand for subprime mortgages. Banks had started financing their loans with mortgage-backed securities.

An Interest-Only Mortgage Example

In some cases, the borrower may have to pay only interest for the entire term of the loan, which requires them to manage accordingly for a one-time lump sum payment. Interest-only payments may be made for a specified time period, may be given as an option, or may last throughout the duration of the loan. With some lenders, paying the interest exclusively may be a provision that is only available for certain borrowers. By comparison, a conventional mortgage for $300,000 with a traditional amortization schedule for 30 years and 7.5% interest would have monthly payments of $2,098.