Interest-only vs standard mortgage
With a $400,000 loan at 6.5% over 30 years, a standard mortgage costs about $2,528 a month from day one. An interest-only loan with a 10-year interest-only period costs $2,167 for the first 10 years, then about $2,982 for the last 20, a jump of more than $800 a month. Because the balance stays high longer, total interest is about $65,600 higher.
Pros and cons
- Pros: lower payments at first, more cash flow for investing or other goals, flexibility if your income will grow.
- Cons: no equity from payments during the IO period, a big payment jump later, more total interest, and risk if home prices fall or rates rise on adjustable versions.
Plan for the payment jump
Before choosing an interest-only loan, make sure you can afford the higher later payment, not just the starter payment. Many interest-only loans are also adjustable-rate, so the rate itself may change at the same time.
Compare with a regular loan in the mortgage calculator or see a full schedule in the amortization calculator.
Last reviewed October 2026.
Frequently asked questions
How does an interest-only mortgage work?
For an initial period, often 5, 7 or 10 years, you pay only the interest, so the loan balance does not go down. After that, the loan converts to regular payments of principal and interest over the remaining term, so the payment rises, often sharply.
How is the interest-only payment calculated?
Multiply the loan amount by the annual interest rate and divide by 12. For example, $400,000 at 6.5% is $400,000 × 0.065 ÷ 12 = $2,166.67 a month.
Why does the payment jump later?
Because the whole balance must be repaid in fewer years. A 30-year loan with a 10-year interest-only period has to be paid off in the remaining 20 years, which means a higher payment than a standard 30-year loan would have had.
Who uses interest-only loans?
They are mostly used by borrowers with irregular or rising income, investors who plan to sell within a few years, or high earners who prefer to invest the difference. They are less common today and usually require strong credit and a larger down payment.
Can I pay extra principal during the interest-only period?
Usually yes. Any extra principal you pay lowers the balance, which lowers both the interest-only payment and the later payment. Check your loan terms for prepayment rules.