On the hunt for a mortgage solution that will deliver low monthly payments and maximum flexibility? Finding the best interest-only mortgage lender could be a solution.
With an interest-only mortgage, you only pay interest for the first several years, not your principal. This option is great if you’re seeking short-term home ownership (perhaps to fix up a property and resell it) or plan to refinance in the near future. However, this approach is only right for some homebuyers, so it’s crucial to know what you’re getting into.
To help, we’ve outlined all the essentials about interest-only mortgages: what they are, when they’re valuable, and how you can work with the best interest-only mortgage lenders.
- What is an interest-only mortgage?
- Best lenders for this type of home loan
- Interest-only loans vs. other mortgages
- What about adjustable-rate mortgages?
- Advantages of interest-only home loans
- Disadvantages of these mortgages
- How to get pre-approved
- Alternatives financing options
What is an interest-only mortgage?
An interest-only mortgage loan is a home loan with a lower interest rate for a set period (up to 10 years) at the beginning of repayment. Monthly payments only cover the interest that accrues on the loan. The principal loan amount doesn’t decrease during this time.
When the interest-only period ends, repayment of the loan principal and interest starts, typically with a variable APR. You have some options with paying it back: You can refinance your mortgage loan if qualified, pay off the loan in full, or stick to monthly payments. Generally, monthly payments on interest-only mortgage loans increase after the initial repayment period.
The most common interest-only loans are adjustable-rate mortgages (ARMs), although fixed-rate, interest-only mortgages exist. If you keep the mortgage, you’ll likely pay more interest overall than with a traditional 30-year mortgage loan.
Because these loans are relatively risky, interest-only mortgage lenders typically only offer them to borrowers with good credit.
An interest-only loan only makes sense in certain situations, like:
- You want to free up cash-flow.
- You’re buying a second home that will eventually become your primary residence.
- You plan to pay off the mortgage in full once the interest-only period ends.
- You expect your income to increase in the future due to a job change or selling a high-value asset, such as another home.
- The home is a short-term investment.
4 best interest-only mortgage lenders
A variety of trusted lenders offer interest-only mortgages. No one lender is ideal for every prospective homebuyer, but a few consistently receive positive feedback. We’ve compiled a list of the best interest-only mortgage lenders below.
1. LoanDepot
LoanDepot is the fifth largest retail mortgage lender in the U.S. Founded in 2010, LoanDepot offers interest-only mortgages and several other home loan options for borrowers, including:
- Adjustable-rate mortgages (ARMs)
- Conventional mortgage loans
- VA loans
- FHA loans
- Mortgage refinancing
This California-based nonbank mortgage lender offers a 40-year interest-only mortgage product, which allows borrowers to make interest-only payments for the first 10 years. That initial term is then followed by a 30-year term for fixed-rate payments on a fully amortized loan.
Borrowers must meet the minimum qualifications, including a credit score of at least 680. LoanDepot waives refinancing fees for return customers and also offers competitive home equity line of credit rates.
2. New American Funding
New American Funding offers a diverse assortment of home lending products for all individuals. The Orange County, California-based lender is one of the country’s largest privately-owned direct mortgage lenders.
In addition to interest-only mortgages, New American Funding lending options include:
- Fixed-rate mortgage loans
- Conventional loans
- I CAN mortgages
- VA loans
- Adjustable-rate mortgages (ARMs)
- Jumbo loans
- USDA loans
- FHA loans
- Buydown loans
- Non-QM loans
- Reverse mortgages
- Mortgage refinancing
3. NASB
North American Savings Bank (NASB) is a full-service bank headquartered in Kansas City, Missouri. NASB offers flexible loan options, making it a potentially useful option if you’re self-employed, have a low credit score, or only can make a smaller down payment.
This lender also works closely with members of the military. It advertises low lending fees and transparent prices. Although you’ll only find its physical branches in Missouri, NASB is a national lender and operates in all 50 states.
According to Net Promoter, a widely-used metric system designed to gauge customer satisfaction, NASB provides exceptionally high-quality customer service compared to other financial institutions. If you anticipate needing assistance with your no-interest loan application, NASB may be a solid choice.
Along with its banking products, the bank offers a full suite of other home lending options:
- Conventional mortgage loans
- Adjustable-rate mortgages (ARMs)
- VA loans
- FHA loans
- Jumbo loans
- Nonconforming loans
- Flex Loans
- Bank statement loans
- Fannie Mae HomeReady mortgage
- Freddie Mac Home Possible mortgage
- IRA non-recourse loans
- Non-QM loans
- Mortgage refinancing
4. Allied Mortgage Group
Founded in 1993, Allied Mortgage Group offers full-service lending services, including interest-only mortgages.
Operating in 34 states and Washington D.C., Allied doesn’t charge lenders fees, making it a relatively affordable option. With an A-plus rating from the Better Business Bureau and a 4.66 out of 5-star rating, this mortgage lender also has a track record of client satisfaction.
Other mortgage products include:
- Fixed-rate mortgage loans
- Adjustable-rate mortgages (ARMs)
- FHA loans
- Va loans
- USDA loans
- 203(k) mortgage loans
- Non-agency mortgage loans
- Home equity conversion mortgages
Methodology
Credible evaluated loan and lender data points in various categories to identify the “best companies” for mortgages. We looked at each lender’s interest rates, fees, and the availability of repayment terms and discounts. We also considered each company’s eligibility requirements, minimum down payment (for purchase), and the level of customer service provided.
Because every lender has its own system for evaluating borrowers, the best mortgage lenders will depend on an individual’s unique circumstance, the loan features that are most important to them, and the interest rate and terms they qualify for.
Interest-only loans vs. other mortgage loans
The primary difference between an interest-only loan and other mortgage loans is that it features an introductory period where you only have to pay interest each month instead of the mortgage principal and interest. By contrast, other loan products like conventional fixed-rate mortgages and most adjustable-rate mortgages will start the amortization process from the first payment.
Borrowers can make principal payments during an interest-only period, but it’s not required. By only having to pay interest during this period, it allows you to spend less up front on a home. The interest-only period can last up to 10 years.
Most interest-only loans are adjustable-rate mortgages (ARMs), although some lenders offer fixed-rate versions. Because the principal amount doesn’t decrease during the initial period, you often pay more interest charges overall than with a conventional loan. Monthly loan payments will increase significantly after the interest-only period ends.
Depending on your situation, a different type of loan may be a better fit than an interest-only mortgage. For example, if you already own a home, you might consider a home equity loan lender that will allow you to borrow using your equity as collateral to receive a lump sum loan.
| Good to know: Because lenders view interest-only loans as riskier than conventional loan types, they generally ask for higher down payments. You may need a higher income or credit score to qualify for an interest-only loan compared to a regular loan product. |
Are interest-only loans the same as adjustable-rate mortgages?
An adjustable-rate mortgage (ARM) periodically adjusts your interest rate to reflect market conditions. This stands in contrast to fixed-rate mortgages, which lock in a single rate you’ll pay across the entire life of the mortgage.
| Good to know: An ARM can save you money if interest rates decline in the future. However, you may end up paying more if interest rates increase. |
Many lenders structure interest-only loans as adjustable-rate mortgages. However, not all adjustable-rate mortgages are interest-only loans, and not all interest-only loans are adjustable-rate mortgages. An ordinary adjustable-rate mortgage will require you to make regular payments on the principal, starting with your initial loan payment.
Advantages of interest-only mortgages
Interest-only mortgage loans can provide certain advantages to financially savvy homebuyers. Some of the benefits for borrowers who take out an interest-only mortgage loan include:
- Higher home-purchasing limits: You can qualify for a higher purchase limit than conventional loan products would allow for.
- Lower monthly payments: Your payments are lower on the front end of mortgage repayment.
- More cash flow: Having lower payments frees up cash for other investments and financial needs.
- Tax benefits: You can deduct mortgage interest (up to $1 million) on your tax return.
Disadvantages of interest-only mortgages
Interest-only loans aren’t for everyone. If you choose to take out an interest-only mortgage, plan for the following drawbacks:
- Low payments are temporary. The monthly payment on an interest-only mortgage is only lower during the interest-only period.
- Your rates may increase. As an adjustable-rate mortgage, your rates may increase over time — it can happen as often as every month or as infrequently as every five years.
- You won’t build equity. There’s no home equity built up when making interest-only payments.
- Your home value could decrease. If your property depreciates, it may not be worth as much as the remaining principal owed on the mortgage.
- You’ll pay more in the long run. Expect to pay more than you would with a traditional 30-year fixed-rate mortgage.
How to get pre-approved for an interest-only mortgage loan
When choosing a mortgage lender, some companies may allow you to get pre-approved for an interest-only mortgage. To get pre-approved, the lender will perform a soft credit inquiry for a snapshot of your credit. They may also inquire about financial information, such as your monthly bills, your income, and your job status.
| Good to know: Mortgage pre-approval does not guarantee that you will be approved by a lender. You must apply for a mortgage and meet the lender’s credit and other underwriting requirements to qualify for a loan. |
Interest-only loans are not ideal for borrowers with below average credit. Lenders take on greater risk because you won’t contribute to the mortgage principal for up to a decade from the loan origination date. As a result, lenders look for well-qualified borrowers with a minimum credit score of 700 or higher, a debt-to-income (DTI) ratio of 43% or lower and a down payment of at least 20%. However, standards vary among lenders, so you’ll want to shop around.
Alternatives to interest-only mortgage loans
Interest-only mortgage loans are a niche financial product, and other mortgage products may better suit your needs. Before you take out an interest-only mortgage, check out these alternatives first.
Conventional fixed-rate mortgage
A fixed-rate mortgage features fixed interest rates that last for the life of the loan, protecting you from rising interest rates (and you could always refinance to take advantage of falling rates). Monthly principal and interest payments also stay the same over the repayment period. Conventional mortgage loan terms typically range from 10 to 30 years.
FHA loan
FHA loans are mortgage loans available through approved lenders backed by the Federal Housing Administration (FHA). Because the FHA covers mortgage insurance on the home, FHA loans are generally easier to qualify for and allow for lower down payments and closing costs. With an FHA loan, your down payment can be as low as 3.5% of the purchase price.
FHA loans come in a variety of forms. You can choose between fixed and adjustable-rate mortgages. Section 245(a) FHA loans work similarly to interest-only loans, and this loan type gradually increases your payments over time. However, the two loan types differ in that section 245(a) loans require you to pay toward the principal immediately, albeit at a lower initial rate.
Hybrid mortgages
Hybrid mortgages combine aspects of fixed-rate and ARM mortgages. With a hybrid mortgage, you’ll commit to a fixed interest rate for a set period, after which the interest rate will adjust to market conditions.
Because hybrid mortgages often offer low initial rates, they may suit your needs if you anticipate selling your home before the interest rate adjusts. You may also find a hybrid mortgage beneficial if you believe interest rates will drop in the future.