How we chose the best interest-only mortgage lenders
Our team of mortgage experts follows an objective, consumer-first methodology to assess home loan lenders and pick the best lenders for interest-only loans.
We review more than 40 lenders, including major banks, credit unions, and online lenders operating across multiple states.
Each lender is evaluated across ten weighted categories covering rates and fees, types of home loans offered, rate transparency and customer experience.
11,000+11k+
Data points analyzed
Our team tracks and reassesses thousands of data points annually for reviewed lenders, ensuring up-to-date, accurate comparisons across multiple loan types.
Star rating categories
We evaluate the following categories and carefully weigh how each factor impacts your experience.
For inclusion in this roundup, lenders must earn 4.5 stars or above according to our home loans overall methodology and must confirm the availability of interest-only loans in NerdWallet’s annual lender survey.
NerdWallet rates mortgage lenders based on what matters most to borrowers: rates and fees, product accessibility, customer experience, rate transparency and the range of loan options.
We review more than 40 lenders and score them using a weighted system that prioritizes affordability and a smooth borrowing experience. Lenders earn higher scores for offering lower borrowing costs, making loans widely available, clearly displaying rate information and supporting borrowers from application through closing. We use a mix of lender-provided information, publicly available data and our own research and analysis to evaluate each lender. Recent regulatory actions may affect a lender’s score.
What is an interest-only mortgage?
An interest-only mortgage requires payments of just the interest for the first years of the loan. You’re not paying back any of the borrowed money (the principal) yet. The interest-only period on these loans can last as long as 10 years. Many interest-only mortgages are jumbo loans. These super-sized loans are for higher-priced properties that don't meet conventional loan standards. Interest-only home loans are often structured similarly to adjustable-rate mortgages, with two distinct phases. During the initial phase, the interest rate is fixed — and you're only paying for the interest. Those extra-low monthly payments are arguably an interest-only loan's biggest plus. Since you're only paying interest, your principal remains the same. On one hand, it's not getting bigger, but on the other hand, it's not shrinking either, so you aren't building home equity. Once that term ends, you enter the amortization phase. As with a regular ARM, in this second phase the loan's rate will begin to adjust up or down based on prevailing interest rates. With an interest-only loan, the biggest difference transition isn't the new interest rate — it's that you'll now be on the hook for paying the principal AND interest, which can mean significantly higher monthly payments. (One plus: Now you'll finally start growing your equity.)
Even if your interest rate moved lower, the principal payments kicking in will be a big increase. You may also be repaying the principal on an abbreviated timeline. If your 30-year interest-only loan had a 10-year interest-only period, for example, you've now got just 20 years to repay the entire principal.
However, most borrowers who get an interest-only mortgage do so because they intend to pay off the loan or refinance to a different type of mortgage before the interest-only period ends.
Is it hard to qualify for an interest-only mortgage?
Interest-only loans are generally harder to qualify for than traditional mortgages. Lenders often require a down payment of 15% or more and a low debt-to-income ratio. Lenders might also require a good-to-excellent credit score for an interest-only mortgage — for example, a FICO score of 680 or higher. Last, lenders may also want to see evidence of substantial assets or cashflow to gauge your ability to successfully repay the loan. Is there a downside to an interest-only loan if you're planning to sell or refinance?
Planning to ditch your interest-only loan assumes that the property value will remain stable or increase. While that can feel like a safe bet, real estate's appreciation isn't guaranteed. If home values have decreased in your area and you end up selling for less than the mortgage balance, you’ll have to make up that difference to repay the loan. Likewise, it could be harder to refinance if home values have fallen, since interest-only payments mean your only equity comes from your down payment and you don't have equity built through appreciation.
Why get an interest-only mortgage?
Interest-only mortgages aren't a fit for most borrowers, but there are a few scenarios where this type of loan could make sense.
An interest-only mortgage might be a good fit if you don't plan to live in the property for long and want to preserve the cash you'd spend on monthly principal payments for other investments. It's best if you are in a strong financial position and do not need to build home equity. For example, this type of mortgage could make sense if your job requires you to temporarily transfer to a new location and the interest payments cost less than renting. Other potential candidates for interest-only loans include investors looking to flip houses, people who anticipate receiving a substantial sum from an inheritance or trust, or those who are just starting out in a high-paying field. You may also consider an interest-only mortgage if you have the money to pay off the loan, but it’s tied up in an investing tool (such as a CD or bond) that will mature before the end of the interest-only period. More from NerdWallet
