Interest-Only vs. Conventional Mortgage
During the interest-only period you pay less each month, but your balance never decreases. When the IO period ends, your payment recasts — often increasing substantially.
| Feature | Interest-Only | Conventional |
|---|---|---|
| Initial payment | Lower ✓ | Higher |
| Equity building | None during IO | From day 1 ✓ |
| Balance after IO period | Unchanged | Reduced ✓ |
| Total interest paid | More | Less ✓ |
| Payment predictability | Payment shock risk | Stable ✓ |
| Best for | Investors / short-term | Long-term homeowners |
Frequently Asked Questions
An interest-only mortgage requires you to pay only the interest during an initial period (typically 5–10 years). You pay no principal during this time, so your balance doesn't decrease. After the interest-only period ends, payments increase significantly as you repay principal and interest.
Interest-only payments are typically 20–35% lower than fully amortizing payments during the initial period. For example, on a $400,000 loan at 7%, a fully amortizing 30-year payment is about $2,661/month while an interest-only payment is $2,333/month — saving $328/month initially.
Interest-only mortgages can benefit investors who plan to sell before the IO period ends, high-income borrowers with irregular cash flow, or buyers who expect income to grow significantly. They are riskier for typical homebuyers since no equity is built during the IO period.
When the IO period ends, the loan recasts — your remaining balance is amortized over the remaining term. This typically causes a significant payment increase (payment shock). For a 10-year IO on a 30-year loan, the recast happens at year 10 with only 20 years remaining.
Some lenders qualify you based on the IO payment, which can allow you to borrow more initially. However, lenders now commonly qualify on the fully amortized payment to ensure affordability. Check with your specific lender for their qualification criteria.
Yes, interest-only mortgages carry more risk than conventional mortgages. If property values fall, you have no equity buffer. When the IO period ends, payment shock can make the loan unaffordable. They were a major factor in the 2008 financial crisis and are now less common.