Interest-only mortgages
The lower payment is real, and so is the reset. In the filings these are not cheap loans that defer principal — they are expensive loans that also defer principal, priced a full point above the rest.
What the payment leaves out
An interest-only mortgage lets you pay only the interest for an opening period — usually five to ten years — before the loan converts to full payments over the remaining term.
The relief is real and the arithmetic behind it is unforgiving. On a $500,000 loan at 7%, interest alone is about $2,917 a month against roughly $3,327 fully amortising: around $410 saved. When the period ends, the same balance has to amortise over twenty-five years instead of thirty, and the payment rises to about $3,533 — higher than it would ever have been.
You also owe exactly what you borrowed. Ten years in, a borrower who took the full payment is around $100,000 lighter on principal; the interest-only borrower is where they started, and every dollar of that gap has been paying interest the whole time.
What the filings show
This is the part the sales conversation rarely covers: interest-only loans are not cheap loans that defer principal. They are expensive loans that also defer principal.
Across purchase loans in the year, the ones with an interest-only period were written at a median rate a full percentage point above the ones without, and their closing costs were higher too. The figures are here.
That reverses the usual intuition. A borrower comparing monthly payments sees the interest-only loan winning and concludes it is the cheaper loan. It is the more expensive loan, sold on a payment.
When it is a defensible choice
Income that arrives in lumps. Commission, bonus or equity that lands annually can service a low monthly floor and pay principal down in chunks — if the loan allows extra principal during the period, which not all do.
A genuinely short hold. If the property is being sold or refinanced before the reset, amortisation was never going to happen anyway. The risk is that the timeline slips and the reset arrives regardless.
Coverage arithmetic on an investment. On a rental, deferring principal raises the debt service coverage ratio and makes the property qualify. That is a qualifying tactic, not a saving.
What to ask
Can you pay principal during the period, without penalty? This single answer separates a flexible loan from a trap.
What is the payment after the reset, on today’s rate? Ask for the number in writing. If the loan is also adjustable, ask for it at the rate cap as well — that is the worst case you are agreeing to.
Is there a prepayment penalty? Interest-only loans carry them more often than conventional ones, and a penalty is precisely what stops you leaving before the reset.
Then take both payments — the interest-only one and the fully amortising alternative — and compare the total cost over the years you will hold the loan. The monthly figure answers a question about cash flow. It does not answer the question about cost.