Short answer: with an interest-only mortgage, some scheduled payments cover only the interest, so the amount you owe does not go down during that period. When the period ends, the payment rises because principal must then be repaid over the years that are left. Under the general federal definition, such a loan is not a qualified mortgage, and the lender must check that you can afford the higher payment. This page covers federal law only; other rules may apply where you live. It is general information, not legal or financial advice.
What counts as interest-only
Under Regulation Z, interest-only means that, under the terms of the loan, one or more periodic payments may be applied only to accrued interest and not to principal; an interest-only loan is a loan that permits such payments (12 CFR 1026.18(s)(7)(iv), eCFR, text up to date as of October 28, 2026, read October 30, 2026). The CFPB says the amount you owe does not go down with each interest-only payment, and that once the period ends you may pay off the balance at once, refinance if that is available, or begin monthly payments that are higher than the interest-only payments (CFPB, last reviewed September 11, 2024, read October 30, 2026; this page may be out of date). It also suggests that you not assume you will be able to sell or refinance if the payment rises, and that you consider another loan if you cannot afford the higher payment on your income today.
Example: payment before and after
This example is only for the math, with an example balance and rate, not terms from any lender. It compares a 30-year fixed-rate loan with 10 years of interest-only payments and a 30-year fixed-rate loan that amortizes from the start. Payments are principal and interest, rounded to the dollar, before taxes and insurance.
| Item | Interest-only for 10 years | Amortizing from the start |
|---|---|---|
| Loan amount and rate | $400,000 at 6.5% | $400,000 at 6.5% |
| Payment, months 1 to 120 | $2,167 (interest only) | $2,528 |
| Payment, the last 240 months | $2,982 | $2,528 |
| Balance after 120 months | $400,000 | $339,150 |
| Total paid: $2,167 × 120 + $2,982 × 240, or $2,528 × 360 | $260,040 + $715,680 = $975,720 | $910,080 |
| Interest: total paid − $400,000 | $575,720 | $510,080 |
In this example, the payment rises by $2,982 − $2,167 = $815 a month when the interest-only period ends, because the full $400,000 is then repaid over 240 months instead of 360. Over the life of the loan, the interest-only version costs $575,720 − $510,080 = $65,640 more in interest. With an adjustable rate, the later payment could be higher still.
Why it is not a qualified mortgage
Under the general definition, a qualified mortgage must have regular periodic payments that are substantially equal (apart from rate changes) and that do not let you defer repayment of principal, among other conditions (12 CFR 1026.43(e)(2)(i)(B), eCFR). The small creditor portfolio and seasoned loan categories also build on that requirement (1026.43(e)(5)(i)(A) and (e)(7)(i)(B)). A loan can still be made without qualified mortgage status, but the lender must make a reasonable, good faith determination that you can repay it (1026.43(c)(1)). See the mortgage ability-to-repay rule.
How the lender must check the higher payment
For an interest-only loan, the lender must consider your ability to pay using the greater of the fully indexed rate or any introductory rate, and substantially equal monthly payments of principal and interest that repay the loan amount over the term left on the date the loan is recast (12 CFR 1026.43(c)(5)(ii)(B)). For an interest-only loan, recast means the end of the period when interest-only payments are allowed (1026.43(b)(11)). In the example above, that is the $2,982 payment, not the $2,167 payment.
Where it shows on the Loan Estimate
| Where | What it shows | Rule |
|---|---|---|
| Product | The feature with its time period, such as “5 Year Interest Only, Fixed Rate” | 1026.37(a)(10)(ii)(B); comment 37(a)(10)-2.ii |
| Loan Terms, Principal & Interest | Under “Can this amount increase after closing?”, that only interest is due and the due date of the last such payment, with the phrase “Includes only interest and no principal until” | 1026.37(b)(6)(iii); comment 37(b)(6)(iii)-1 |
| Projected Payments | The term “only interest” in the payment column for the years that include interest-only payments | 1026.37(c)(2)(i); comment 37(c)(3)(ii)-1 |
| Adjustable Payment (AP) Table | A yes or no answer to “Interest Only Payments?” and, if yes, the period of those payments | 1026.37(i)(1) |
Sources: 12 CFR 1026.37 (eCFR) and Supplement I to part 1026 (eCFR). The official comments say the payment may change for the Projected Payments table when the interest-only period ends (comment 37(c)(1)(i)(A)-3). The AP Table appears only when the principal and interest payment may change for a reason other than a rate change, or for a seasonal payment product (1026.37(i)). For when the Loan Estimate is due, see when a mortgage application starts.
Related features
If the loan also has an adjustable rate, rate change notices apply; see adjustable-rate mortgage reset notices. If the loan ends with a large final payment instead of a higher monthly payment, see balloon payment loans and the CFPB answer on balloon payments. To lower a payment with a lump sum later, see mortgage recast vs refinance.
Questions to ask the lender
- How long is the interest-only period, and what is the due date of the last interest-only payment?
- What will my principal and interest payment be after that, and over what number of months will principal be repaid?
- Is the rate fixed or adjustable, and what is the highest payment the loan can reach?
- Is this a qualified mortgage?
- Can I pay principal during the interest-only period, and is there a prepayment penalty?
Checklist
- Find the interest-only label in the Product line of your Loan Estimate.
- Note the payment after the interest-only period and check that you can afford it on your income today.
- Compare total interest with an amortizing loan for the same amount.
- Do not count on selling or refinancing before the payment rises.
- Mark the end date of the interest-only period on your calendar.
You can submit a complaint at consumerfinance.gov/complaint.
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Sources
- eCFR: 12 CFR 1026.18, Content of disclosures (Regulation Z), current text up to date as of October 28, 2026
- CFPB: What is an “interest-only” loan? (last reviewed September 11, 2024)
- eCFR: 12 CFR 1026.43, Minimum standards for transactions secured by a dwelling (Regulation Z), current text up to date as of October 28, 2026
- eCFR: 12 CFR 1026.37, Content of disclosures for certain mortgage transactions (Loan Estimate) (Regulation Z), current text up to date as of October 28, 2026
- eCFR: Supplement I to Part 1026, Official Interpretations (Regulation Z), current text up to date as of October 28, 2026
- CFPB: What is a balloon payment? When is one allowed?
- CFPB: Submit a complaint
Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.