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Interest-only loans allow you to pay just the interest for a set period, resulting in lower initial payments. Many lenders specializing in self-employed borrowers offer this option for borrowers seeking cash flow flexibility.

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How It Works

During the interest-only period (typically 5 or 10 years), your payment covers only interest—no principal reduction. After this period, the loan converts to fully amortizing payments over the remaining term. Example on a $500,000 loan at 7.5%: The tradeoff: you’re not building equity during the interest-only period, and payments increase when it ends.

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Who Benefits from Interest-Only

  • Borrowers with variable income who want lower base payments
  • Investors prioritizing cash flow over equity building
  • Those planning to sell or refinance before the IO period ends

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Important Considerations

Qualification: Lenders qualify you based on the fully amortized payment, not the interest-only payment. This means interest-only doesn’t increase borrowing power—it just reduces initial payments. Requirements: Some lenders require higher credit scores, lower LTV, or additional reserves for interest-only loans. Payment shock: Be prepared for a significant payment increase when the interest-only period ends—often 25-30% higher.