Interest-Only Mortgages Explained Simply
With an interest-only mortgage you pay just the interest for the first years, so your payment is lower — but your balance doesn’t shrink, and the payment jumps when the period ends. Here’s the full picture with real numbers.
By Bogdan · Updated
A normal mortgage payment pays some interest and some principal (the amount you borrowed) every month. An interest-only mortgage lets you skip the principal for the first years — often 5, 7 or 10.
Explain it like I’m 5
Imagine you borrow a bike and pay your friend a few coins each week just for using it. You haven’t paid for the bike itself yet — you still owe the whole bike.
After a while your friend says: “Time to start paying for the bike, too — and you have less time to do it.” Now each weekly payment is much bigger. That jump is called payment shock.
See your interest-only payment, the jump afterwards and the total cost with the interest-only loan calculator.
Worked example
A $400,000 loan at 7%, 30 years, with the first 10 years interest-only:
| Interest-only loan | Normal 30-year loan | |
|---|---|---|
| Payment, years 1–10 | $2,333.33 | $2,661.21 |
| Balance after 10 years | $400,000 | ~$343,250 |
| Payment, years 11–30 | $3,101.20 | $2,661.21 |
| Total interest | ~$624,300 | ~$558,000 |
You save about $328 a month for 10 years, then pay about $440 a month more than the normal loan for 20 years — and roughly $66,000 more in interest overall.
Pros
- Lower payment in the early years, freeing cash for other things.
- Flexibility: you can usually pay principal when you have spare money.
- Can make sense for investment property cash flow, or if you’ll sell or refinance before the period ends.
Cons and risks
- No equity from payments. Your stake in the home only grows if its value rises.
- Payment shock when principal payments start.
- Higher total cost.
- Refinancing isn’t guaranteed — rates, your income or the home’s value may change.
- Usually harder to qualify for, and rates can be higher than standard loans.
Don’t confuse this with a balloon loan, where the whole remaining balance is due in one payment at the end.
Questions to ask yourself
- Could I afford the full payment after the switch today?
- Will I really pay extra in good months?
- What happens if the home’s value falls and I can’t refinance?
Frequently asked questions
How is an interest-only payment calculated?
Loan balance times the yearly interest rate, divided by 12. On a $400,000 loan at 7%, that’s $400,000 × 0.07 ÷ 12 = $2,333.33 a month.
What happens when the interest-only period ends?
You start paying principal and interest over the years left on the loan. Because you still owe the full amount and have less time to repay it, the payment jumps. A $400,000 loan at 7% goes from $2,333 to about $3,101 a month after a 10-year interest-only period on a 30-year loan.
Do interest-only loans cost more in total?
Usually yes. In the example above, total interest is about $624,000, compared with about $558,000 on a normal 30-year loan at the same rate — around $66,000 more, because the balance stays high for longer.
Who should consider an interest-only mortgage?
People with uneven or rising income (like commission or bonus earners) who will pay extra when they can, investors focused on cash flow, or buyers who plan to sell before the interest-only period ends. It’s risky for anyone counting on the low payment lasting.
Can I pay principal during the interest-only period?
Usually yes. Extra payments lower the balance, and on many loans the interest-only payment is recalculated on the lower balance. Check your loan terms.
This article is for general education and is not financial, investment or tax advice. Rates, rules and limits change; check current terms with your bank or the IRS. See our disclaimer.