Can You Still Get Interest-Only Mortgages?

Interest-only mortgages allow borrowers to pay only the interest on their loan for a set period. This results in lower monthly payments initially, offering cash flow flexibility. After this introductory phase, which typically lasts several years, the loan transitions to a traditional repayment schedule where both principal and interest are paid. This mortgage type appeals to those who expect higher future income or plan to sell the property before the interest-only period ends.

Current Availability

Interest-only mortgages are still available, though less prevalent than before the 2008 financial crisis. Stricter lending regulations, like Ability-to-Repay (ATR) and Qualified Mortgage (QM) rules, categorize these loans as risky. Consequently, interest-only mortgages generally do not qualify for government-backed programs such as FHA, VA, or USDA loans.

These loans are primarily found in specific market niches, offered by portfolio lenders, private banks, or specialized mortgage providers. They are often associated with jumbo loans or investment properties. High-net-worth individuals use them for liquidity management or strategic investments. Large U.S. lenders like Bank of America and Chase Bank offer these products, but with stringent eligibility requirements.

How Interest-Only Mortgages Function

An interest-only mortgage operates in two phases: an initial interest-only payment period and a subsequent principal-and-interest (P&I) repayment period. During the interest-only phase, typically five to ten years, borrowers pay only the interest on the outstanding principal balance. The principal loan amount does not decrease during this time unless the borrower makes additional payments.

Once the interest-only period concludes, the loan “recasts,” and monthly payments increase to include both principal and interest. This recalculation is based on the original principal balance and the remaining, shorter loan term. For example, a 30-year loan with a 10-year interest-only period will amortize the principal over the remaining 20 years, resulting in higher payments than a traditional 30-year amortizing loan. This payment increase requires careful financial planning to manage the new, higher obligation.

Borrower Qualification Requirements

Lenders consider interest-only mortgages higher risk, leading to more rigorous qualification standards than traditional loans. Borrowers generally need a strong credit score, often above 700, with some lenders requiring 740 or higher for favorable terms. A lower debt-to-income (DTI) ratio is also typically required, often 36% or less, though some sources indicate up to 43%. This ratio ensures a borrower’s monthly debt payments, including the potential higher mortgage payment, do not consume too large a portion of their gross income.

A larger down payment is expected for interest-only mortgages, often 15% to 20% or more of the property’s value. Lenders also seek proof of substantial income and liquid assets, like investment accounts or savings, to demonstrate the borrower’s capacity to handle increased payments when the interest-only period ends. Property type and loan purpose (e.g., primary residence or investment property) can also influence eligibility.

The Application and Closing Process

The application process for an interest-only mortgage begins with an initial consultation and pre-approval, where a lender assesses eligibility. Following pre-approval, the borrower submits a formal application with all required financial documentation. This documentation undergoes a thorough review, and the loan proceeds to underwriting, where the lender evaluates the borrower’s creditworthiness and the property’s value.

An appraisal determines the property’s market value, helping the lender confirm the loan-to-value ratio. Once underwriting is complete and all conditions are met, the loan receives final approval. The final stage is the closing process, typically held at a title company or attorney’s office. At closing, the borrower signs various legal documents, including the Closing Disclosure, which details final loan terms and closing costs, and the promissory note. Funds are then transferred, and property ownership is legally conveyed.