Yes, you can still get an interest-only mortgage, but the product now lives outside mainstream lending. These loans no longer meet the federal definition of a “qualified mortgage,” so you will not find them through standard conforming, FHA, or VA programs. Instead, they are offered by private portfolio lenders, credit unions, and specialty non-QM lenders that hold the loans on their own books. Borrowers who qualify tend to be high-net-worth individuals, real estate investors, or self-employed professionals with substantial but irregular income.
Where These Loans Are Still Offered
Federal law is the main reason interest-only mortgages moved to the margins. The Truth in Lending Act’s ability-to-repay rule requires lenders to confirm that a borrower can handle the fully amortizing payment, not just the lower interest-only amount, and the statute defines “qualified mortgage” in a way that explicitly excludes loans with interest-only features.1Office of the Law Revision Counsel. 15 USC 1639c – Minimum Standards for Residential Mortgage Loans Qualified mortgages give lenders a legal safe harbor against certain borrower lawsuits, so most large banks stopped offering interest-only products altogether.
Fannie Mae and Freddie Mac reinforce the split. The Federal Housing Finance Agency directed both enterprises to limit their purchases to qualified mortgages, which means they will not buy interest-only loans.2FHFA. FHFA Limiting Fannie Mae and Freddie Mac Loan Purchases to Qualified Mortgages A lender that originates an interest-only mortgage has to keep it on its own balance sheet or sell it to a private investor. That added risk drives stricter qualification standards and higher rates.
Non-QM and Jumbo Products
The most common path is a non-qualified mortgage. These loans still comply with the ability-to-repay rule, but they fall outside the narrower qualified-mortgage definition. Interest-only features often appear in adjustable-rate mortgages where the initial fixed-rate period matches the interest-only window, typically five, seven, or ten years. Some lenders also offer 30-year fixed-rate loans with interest-only payments during the first decade.
DSCR Loans for Investors
Real estate investors have a separate route. Debt-service-coverage-ratio loans qualify the property itself rather than the borrower’s personal income. The lender divides expected rental income by the monthly mortgage payment, and most look for a DSCR of at least 1.0 to 1.25, meaning rent covers 100 to 125 percent of the payment. Interest-only options show up on these loans because a lower monthly payment improves the coverage ratio. DSCR loans are exclusively for investment properties; you cannot use one for a primary residence.
How Interest-Only Payments Work
During the interest-only period, your monthly payment covers only the interest that accrues on the balance. None of it reduces principal. Borrow $500,000 at 7 percent and your monthly interest-only payment runs roughly $2,917. You still owe the full $500,000 at the end of that period.
Most interest-only mortgages let you make optional principal payments during the interest-only phase. There is no rule against it. Some borrowers use that flexibility to direct cash toward higher-return investments or to smooth uneven income years while still chipping away at the balance when they can.
What It Takes to Qualify
Because lenders assume more risk, qualification is noticeably tougher than for conventional financing. Federal regulations require the lender to underwrite you against the fully amortizing payment, not the lower interest-only amount.3eCFR. 12 CFR 1026.43 – Minimum Standards for Transactions Secured by a Dwelling In practice, you have to show you could afford a significantly higher payment than the one you will actually make in the early years.
Typical requirements from non-QM lenders:
- Credit score of at least 700 to 720, with scores above 740 earning better pricing.
- Down payment of 20 to 30 percent. A larger down payment offsets the risk from deferred principal reduction.
- Debt-to-income ratio generally capped around 43 percent, calculated on the fully amortized payment.
- Liquid reserves covering six to twelve months of full mortgage payments, including taxes and insurance.
Qualified mortgage rules no longer use a fixed 43 percent DTI cap; the CFPB replaced it in 2020 with a price-based threshold tied to the average prime offer rate.4Federal Register. Truth in Lending (Regulation Z) Annual Threshold Adjustments But since interest-only loans are non-QM by definition, each lender sets its own DTI limits, and 43 percent remains a common internal benchmark.
Bank Statement Programs
Self-employed borrowers who cannot document income through W-2s may qualify using 12 or 24 months of bank statements. Lenders typically count 100 percent of deposits from personal accounts and roughly 50 percent from business accounts, then average the totals to calculate monthly qualifying income. These programs suit borrowers whose tax returns understate cash flow because of business deductions.
Asset Depletion
Borrowers who are asset-rich but income-light, such as retirees living off investments, can sometimes qualify through asset depletion underwriting. The lender converts your liquid assets into a hypothetical monthly income figure. A common formula divides net qualifying assets, after subtracting the down payment, closing costs, and required reserves, by 84 months. That figure becomes your monthly income for DTI purposes. Some programs use divisors between 60 and 120 months.
What Happens When the Interest-Only Period Ends
The most consequential moment in one of these loans is the day the interest-only window closes, usually after five or ten years. The loan then recasts: the full original principal balance amortizes over whatever time remains. On a 30-year mortgage with a 10-year interest-only period, the entire principal has to be repaid within the final 20 years.
The payment increase can be dramatic. According to the Office of the Comptroller of the Currency, monthly payments can rise by as much as double or triple when principal amortization kicks in, even if the interest rate stays the same.5Office of the Comptroller of the Currency. Interest-Only Mortgage Payments and Payment-Option ARMs If the loan also carries an adjustable rate, a higher rate stacked on top of principal amortization pushes the payment further.
Loan servicers are required to notify you before this transition, giving you several months to adjust. Borrowers who do not prepare for the shift face the highest risk of default. Before signing, you should also know that the Loan Estimate for an interest-only loan must specifically identify the product as “Interest Only,” disclose the date the interest-only period ends, and show projected payments in separate columns for the interest-only phase and the amortizing phase.6Consumer Financial Protection Bureau. TILA-RESPA Integrated Disclosure – Guide to the Loan Estimate and Closing Disclosure Forms Read those columns carefully.
Risks to Weigh
Interest-only mortgages carry real financial risks beyond the payment jump.
- No equity from payments. Your ownership stake only grows if the property appreciates or you make voluntary principal payments.
- Negative equity exposure. If property values fall while you hold an interest-only loan, you can end up owing more than the home is worth, and the odds are higher than with a traditional loan because you have not reduced principal at all.
- Refinancing risk. Many borrowers plan to refinance before the interest-only period ends. If home values have not risen, you may not have enough equity to qualify for a new loan, and rising rates can make any replacement loan more expensive.
- Prepayment penalties. Non-QM loans frequently include penalties for paying off or refinancing within the first few years. Some are a fixed percentage of the balance; others decline over time. Ask before signing.
- Higher rates. Interest-only mortgages generally carry higher rates than comparable fully amortizing loans.
Tax Treatment
Interest on one of these mortgages is generally deductible on your federal return under the same rules that apply to any home mortgage. You have to itemize on Schedule A, and the loan must be secured by a home you own and live in, or a second home.7Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
The deduction is capped by the total mortgage balance. For mortgages taken out after December 15, 2017, the Tax Cuts and Jobs Act set the cap at $750,000, or $375,000 if married filing separately. Older mortgages fall under the previous $1 million limit.7Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction Several provisions of the Tax Cuts and Jobs Act were scheduled to expire after 2025, which could affect the applicable limit for 2026 and beyond. Check current IRS guidance before relying on a specific figure.
Because interest-only payments are all interest, every dollar you pay during the interest-only phase is potentially deductible up to the applicable cap. That makes these loans marginally more tax-efficient in the early years than a traditional loan, where a growing share of each payment goes to non-deductible principal.
Who These Loans Actually Suit
Interest-only mortgages are not designed for every borrower, but they fit certain financial situations well. They tend to make sense for people with high but uneven income, such as commission-based professionals, business owners with seasonal revenue, or investors who want to maximize cash flow from a rental property in the early years. Retirees with substantial assets but limited monthly income can also benefit, particularly when paired with an asset depletion qualification.
The common thread among borrowers who do well with these loans is a clear plan for what happens when the interest-only period ends, whether that means refinancing, selling the property, or absorbing the higher amortizing payment. Without that plan, the flexibility of the early years turns into a serious burden later.