# Interest-only mortgages

> How interest-only mortgages work, how much the payment jumps when principal kicks in, why they aren’t Qualified Mortgages, and who uses them.

URL: https://mortgage-math-us.com/loan-types/interest-only-mortgages/  
Last reviewed: 2026-10-28 · By the MortgageMath US Editorial team

## Quick answer

An interest-only mortgage lets you pay just the interest for a set period written into the loan, such as ten years, so the balance doesn’t fall. When that period ends, the loan recasts and you repay the full balance over the remaining years, so the payment jumps — on a $500,000 loan at an example rate of 7.24%, from $3,017 to $3,949 a month after ten years. Interest-only loans can’t be Qualified Mortgages under the CFPB’s rules, so they’re offered as non-QM loans, mainly to borrowers with high or irregular incomes and to investors.

## Key facts

| Fact | Value | Source | As of |
|---|---|---|---|
| Longest term on a Qualified Mortgage | 30 years | [CFPB](https://www.consumerfinance.gov/ask-cfpb/what-is-a-qualified-mortgage-en-1789/) | Jan 7, 2025 |
| QM points-and-fees cap | 3% | [CFPB, Federal Register 90 FR 57890](https://www.federalregister.gov/documents/2025/12/15/2025-22773/truth-in-lending-regulation-z-annual-threshold-adjustments-credit-cards-hoepa-and-qualified) | 2026 threshold |
| General QM APR limit over the average prime offer rate | 2.25% | [CFPB, Federal Register 90 FR 57890](https://www.federalregister.gov/documents/2025/12/15/2025-22773/truth-in-lending-regulation-z-annual-threshold-adjustments-credit-cards-hoepa-and-qualified) | 2026 threshold |
| 30-year fixed average, used as the example rate | 7.24% | [Freddie Mac Primary Mortgage Market Survey](https://www.freddiemac.com/pmms) | Week of Oct 29, 2026 |
| HELOC draw period in the CFPB’s example | 10 years | [CFPB](https://www.consumerfinance.gov/ask-cfpb/what-is-a-home-equity-line-of-credit-heloc-en-107/) | Aug 28, 2026 |

## How an interest-only mortgage works

A normal mortgage is **fully amortizing**: each payment covers that month’s interest plus some principal, so the balance falls to zero by the end of the term. An interest-only mortgage splits the term in two:

1. **The interest-only period** — its length is set in your loan agreement; the example below uses ten years. You pay only the interest that accrues each month. Your balance stays where it started unless you choose to pay extra.
2. **The amortizing period** — the rest of the term. The loan recasts, and the full balance is repaid over the years that remain, which makes each payment larger than on a loan that amortized from day one.

Many interest-only loans are also adjustable-rate mortgages, so the rate can reset around the same time the principal starts, adding a second jump. See [fixed vs adjustable-rate mortgages](https://mortgage-math-us.com/loan-types/fixed-vs-adjustable-rate/) for how ARM caps work.

## The payment jump at recast

> **Worked example: $500,000 loan, 30-year term with a 10-year interest-only period, at an example fixed rate of 7.24%**
>
> | | Interest-only loan | Fully amortizing loan |
> |---|---:|---:|
> | Payment in years 1–10 | $3,017 | $3,407 |
> | Balance after 10 years | $500,000 | $431,453 |
> | Payment in years 11–30 | $3,949 | $3,407 |
> | Total interest over 30 years | $809,724 | $726,697 |
> 
> The interest-only borrower pays $391 a month less for ten years — $46,899 in all — but then faces a payment $932 higher (31% more) and pays $83,028 more interest over the life of the loan. The rate is Freddie Mac’s 30-year fixed average, used only for illustration; interest-only loans are priced by each lender.

The jump is larger than many borrowers expect because the principal is squeezed into 20 years instead of 30. The [mortgage payment calculator](https://mortgage-math-us.com/tools/mortgage-payment-calculator/) shows both payments if you enter the loan as 30 years and then as 20.

## Why interest-only loans aren’t Qualified Mortgages

Under Regulation Z, a **Qualified Mortgage (QM)** must have regular payments that don’t increase the balance and don’t let you defer repayment of principal, generally no balloon payment, and a term of no more than 30 years. An interest-only period defers principal, so an interest-only loan can never be a QM, whatever your income or credit. QMs also cap points and fees at 3% of the loan.

That doesn’t make interest-only loans illegal. Lenders can still make them under the **ability-to-repay rule**, which applies to most home loans. That rule says how to test an interest-only loan: the lender must check that you can afford the payment that repays the loan over the term remaining after the recast — $3,949 a month in the example, not $3,017. So an interest-only loan generally won’t help you borrow more; it changes when you pay principal, not how much you must earn to qualify — see [debt-to-income ratio](https://mortgage-math-us.com/buying/debt-to-income/).

Because the lender doesn’t get the QM legal protection, non-QM loans often come with higher rates, larger down payments or stricter reserve requirements. Credit used mainly for business purposes, such as many investor loans, falls outside these consumer rules altogether — see [DSCR investor loans](https://mortgage-math-us.com/loan-types/dscr-loans/).

## Who uses interest-only loans

- **Borrowers with large but irregular income**, such as bonuses or commissions, who pay the interest monthly and put lump sums toward principal when the money arrives.
- **High-net-worth borrowers**, often on [jumbo loans](https://mortgage-math-us.com/loan-types/jumbo-loans/), who prefer to keep cash invested and can pay off the balance from assets.
- **Property investors**, who care about monthly cash flow and plan to sell or refinance.
- **Buyers expecting to sell within the interest-only period**, who accept the risk that a sale may not happen on schedule.

Home equity lines of credit often work in a similar way: a draw period — 10 years in the CFPB’s example — with interest-only payments, followed by repayment. The [HELOC payment calculator](https://mortgage-math-us.com/tools/heloc-payment-calculator/) shows that jump.

## The risks

> **Watch out: No equity from your payments**
>
> During the interest-only period, your payments don’t reduce the debt. If the home in the example was bought for $625,000 with 20% down and is worth 10% less ten years later ($562,500), the interest-only borrower still owes $500,000, while the amortizing borrower owes $431,453 — $68,547 less. With a smaller down payment or a bigger price drop, an interest-only borrower can end up owing more than the home is worth.

- **Payment shock** when principal kicks in, and possibly a rate reset at the same time.
- **Refinancing risk** — counting on a refinance before the recast depends on your income, credit, home value and rates at that time.
- **Higher lifetime cost**, because you pay interest on the full balance for longer.

## Alternatives to consider

If the goal is a lower required payment with flexibility, a standard 30-year fixed loan with extra principal payments in good months can give you some of the same control without the recast — the [extra payment calculator](https://mortgage-math-us.com/tools/extra-payment-calculator/) shows the effect. If the goal is a lower start rate for a few years, a [fixed-period ARM](https://mortgage-math-us.com/loan-types/fixed-vs-adjustable-rate/) still amortizes from the first payment.

## Frequently asked questions

### How does an interest-only mortgage work?

You pay only the interest for a set period written into the loan, so the balance doesn’t fall. Then the loan recasts and you repay principal and interest over the remaining term, which raises the payment.

### How much does the payment go up after the interest-only period?

It depends on the rate and the years left. In the example, a $500,000 loan with a 10-year interest-only period rises from $3,017 to $3,949 a month, about 31% more, at the same rate.

### Is an interest-only loan a Qualified Mortgage?

No. Under 12 CFR 1026.43, a Qualified Mortgage can’t let you defer repayment of principal, so interest-only loans are always non-QM. The lender must still verify your ability to repay.

### Can I qualify for a bigger loan with interest-only payments?

Usually not. The ability-to-repay rule makes the lender test the payment you’ll owe after the recast, which is higher than a normal amortizing payment.

### Can I pay principal during the interest-only period?

Usually, yes. On many loans, extra principal lowers both the interest-only payment and the payment after recast. Check your note for how payments are recalculated and for any prepayment penalty.

### Is a HELOC an interest-only loan?

Many HELOCs are interest-only during the draw period — 10 years in the CFPB’s example — then switch to principal-and-interest repayment, with the same kind of payment jump.

## Sources

- [Freddie Mac Primary Mortgage Market Survey](https://www.freddiemac.com/pmms) — 30-year fixed rate, national weekly average (Week of Oct 29, 2026)
- [CFPB](https://www.consumerfinance.gov/ask-cfpb/what-is-a-qualified-mortgage-en-1789/) — Longest term allowed on a Qualified Mortgage (Jan 7, 2025)
- [CFPB, Federal Register 90 FR 57890](https://www.federalregister.gov/documents/2025/12/15/2025-22773/truth-in-lending-regulation-z-annual-threshold-adjustments-credit-cards-hoepa-and-qualified) — Qualified Mortgage points-and-fees cap (loans of $137,958 or more); General QM: APR must stay below the average prime offer rate plus this (first-lien loans of $137,958 or more) (2026 threshold)
- [CFPB](https://www.consumerfinance.gov/ask-cfpb/what-is-a-home-equity-line-of-credit-heloc-en-107/) — Example HELOC draw period (CFPB) (Aug 28, 2026)
- [eCFR: 12 CFR 1026.43 (ability to repay and qualified mortgages)](https://www.ecfr.gov/current/title-12/chapter-X/part-1026/subpart-E/section-1026.43)
- [CFPB: What is a Qualified Mortgage?](https://www.consumerfinance.gov/ask-cfpb/what-is-a-qualified-mortgage-en-1789/)
- [CFPB: Consumer Handbook on Adjustable-Rate Mortgages (CHARM booklet)](https://files.consumerfinance.gov/f/documents/cfpb_charm_booklet.pdf)

_General information, not financial advice._