Pay only interest for 5-10 years. Build zero equity.
Sounds crazy? For some California buyers, it's the perfect strategy.
Better Offers Inc (CA DRE #01212512) is a California mortgage broker that compares interest-only and amortizing loan structures. Here's when an interest-only structure may work -- and when it may not.
How Interest-Only Loans Work
Normal mortgage: Monthly payment includes principal + interest
Interest-only mortgage: First 5-10 years = interest only. Principal starts later.
Example: $600K loan at 6.5%
- Interest-only payment: $3,250/month
- Principal + interest payment: $3,792/month
- Savings: $542/month for first 10 years
After 10 years, your payment jumps to ~$4,400/month (P&I on remaining 20-year term).
Who Uses Interest-Only Loans
1. High-Income Earners with Variable Compensation
Tech exec with $200K salary + $500K annual stock grants. Use interest-only to minimize the required payment. Invest the difference in stocks, business, etc.
2. Real Estate Investors
Goal: Maximize cash flow on rental properties.
- Rental income: $4,000/month
- Interest-only payment: $3,500/month = $500/month cash flow
- Full P&I payment: $4,100/month = -$100/month cash flow
Interest-only makes the deal work.
3. Jumbo Borrowers in Expensive Markets
California median in coastal areas: $1M+. Interest-only lowers payments by 15-20%, making expensive homes more accessible.
4. Short-Term Ownership Plans
Buying a home, planning to sell in 3-5 years. Why pay down principal if you're selling soon?
The Risks
Payment Shock
Year 10 to Year 11: Payment jumps 30-50%. If you can't afford the new payment, you're forced to sell or refinance.
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No Equity Building
You're not paying down principal. If home values drop, you're underwater.
Rate Adjustments
After the fixed period, your rate adjusts annually. If rates rise 2-3%, your payment could double.
Refinance Risk
Plan: refinance before payment increases. Risk: what if you can't refi (bad credit, income loss, home value dropped)?
Who Offers These Loans
Not widely available since the 2008 financial crisis. You'll find them at:
- Jumbo lenders (high-balance loans)
- Portfolio lenders (banks that hold the loan)
- Private banks (relationship-based lending)
Requirements: 20-30% down, 700+ credit score, strong income and assets, DTI typically under 43%.
Interest-Only vs. Traditional Mortgage
| Feature | Interest-Only | Traditional P&I |
|---|---|---|
| Payment (first 10 yrs) | $3,250 | $3,792 |
| Equity after 10 yrs | $0 | ~$80K |
| Payment after 10 yrs | $4,400 | $3,792 (same) |
| Risk | High | Low |
| Best for | Investors, high earners | Most homeowners |
When Interest-Only Makes Sense
Use it if:
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- You're buying an investment property and need cash flow
- You have significant assets but variable income
- You plan to sell within 5-10 years
- You're disciplined and investing the savings
Avoid if:
- You're stretching to afford the payment
- You're a first-time buyer
- You don't understand the risks
- You need to build equity
FAQ
Talk to an expert. These loans are powerful but risky.
Better Offers Inc | CA DRE #01212512