6 minute read
July 9, 2022

What is a Ten-Year Interest Only Mortgage?

What is a Ten-Year Interest Only Mortgage?
6 minute read
July 9, 2022


A ten-year interest-only mortgage can mean significant savings for homeowners with low monthly, interest-only payments during the first decade. 

What is an interest-only mortgage?

An interest-rate-only mortgage is an adjustable-rate mortgage (ARM) that offers an initial period with a “fixed” interest rate—the initial interest won’t change during this time even if the market does.

However, once your initial “fixed” period is over, your interest rate can adjust to align with market rates. 

For example, adjustable-rate mortgage interest rates are typically lower than fixed-rate mortgages with the same interest rate for the loan’s lifetime. 

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What is a ten-year interest-only mortgage?

This loan option is a type of mortgage in which you only pay interest for the first decade. 

Once the initial ten-year period is over, your loan payments will increase to include the principal.

As a result, during those first ten years of the loan, you’ll be paying a significantly lower amount than conventional loans, which include payments comprised of principal and interest.

Understanding how interest-only mortgages work

The initial, interest-only period is commonly available in five-, seven-, and ten-year periods, with a loan lifetime of 30 years. 

Once your initial, interest-only period ends, your mortgage enters the amortization period. 

As a result, your monthly payments will no longer be interest-only from this point forward—they will include principal and interest amounts.

Once your introductory interest-only period is over, you have several options, including 

  • Make regular mortgage payments—combined principal and interest amounts, 
  • Repay the mortgage loan balance in a single lump-sum payment, or
  • Refinance your mortgage into a new one with better loan terms.

By comparison, non-interest-only mortgage payments contain both principal and interest, beginning with your first payment.

Why choose an interest-only mortgage?

The most popular reason for choosing a ten-year interest-only mortgage stems from the lower monthly payments in the beginning. This feature allows you to use the money you would otherwise spend on monthly mortgage payments on other things.

For example, some investors might take advantage of the current housing market, buy a home with a ten-year-interest-only mortgage then sell it at a profit before having to make higher-priced principal payments.

Additionally, because the IRS allows taxpayers to deduct mortgage interest payments, homeowners could benefit from a ten-year interest-only mortgage during the initial period.

Qualifying for an interest-only mortgage

Interest-only mortgage qualifications can be more of a challenge for some borrowers due to their stricter eligibility requirements. 

By comparison, government-backed loans like the Department of Veterans Affairs’ VA loans or the Federal Housing Administration’s FHA loans make it easier for borrowers with lower credit scores or shorter credit histories to qualify. (The same goes for VA refinancing and FHA Streamline.)

While qualifications can vary depending on which mortgage lender you choose, in general, borrowers looking at an interest-only mortgage should have:

  • A minimum FICO/ credit score of 700
  • A DTI (debt-to-income) ratio of 36% or less
  • A minimum down payment totaling 15% of the home’s purchase price
  • Income and assets equal in value to the loan amount borrowed

To demonstrate your ability to handle repayments, you may be asked to provide copies of your paystubs, bank statements, tax returns or other financial documentation.

Types of interest-only home loans

A short-term or long-term interest-only period of time might be the right mortgage loan for you, depending on your goals.

5-Year Adjustable Rate Mortgage

A five-year interest-rate only adjustable-rate mortgage (ARM) is a home loan with a fixed interest rate at the beginning of your mortgage. You’ll pay the same interest rate, and only the interest rate, for the first five years.

Five-year interest-rate-only adjustable-rate mortgages allow for lower monthly payments than other mortgages for the same mortgage amount.

7-Year Adjustable Rate Mortgage

A seven-year interest-rate only adjustable-rate mortgage (ARM) is similar to the five-year interest-rate only mortgage. It is a home loan with a set interest rate for the first seven years of your mortgage.

During this time, your payments will remain the same, and you’ll only pay the interest—giving you a lower reduced mortgage payment than conventional home loans

Seven-year interest-rate-only adjustable-rate mortgages allow for lower monthly payments for the same mortgage amount than other mortgages.

10-Year Adjustable Rate Mortgage

A ten-year interest-only mortgage is an adjustable-rate mortgage with a fixed rate for the first ten years. During those ten years, your interest rate stays the same regardless of the market, and you only pay the interest rate.

Ten-year interest-rate only adjustable-rate mortgages allow for lower monthly payments for the same mortgage amount than other mortgages.

What is the lifetime rate cap?

To help protect homeowners, adjustable-rate mortgages typically have several “caps” or thresholds that help limit how much your interest rate can change. 

The initial adjustment cap determines how much your mortgage interest rate can increase following the initial fixed-rate period.

The initial adjustment cap is often set to between two and five percent. This percentage limits your new, adjusted mortgage interest rate to no more than five percent (or less, depending on the terms of your mortgage).

Other adjustment caps include:

  • Subsequent adjustment cap restricts the amount your interest rate can jump in the subsequent adjustment periods and is often set at two percent
  • Lifetime adjustment cap limits how much your interest rate can jump during the lifetime of your loan, often 30 years

The most common percentage for the lifetime adjustment cap is five percent. Borrowers know they will never pay more interest than the lifetime adjustment cap amount can help them budget for the future.

As concerns of interest rates rising seems to be a part of almost every conversation, 10-year interest-only mortgages allow homebuyers an option to get a more affordable monthly payment and increase the cash flow in their monthly budget.

Get in touch with Assist Home Loans for pre-approval 

Do you have questions about how a ten-year interest-only mortgage could benefit your family? Would you like to know more about adjustable-rate mortgages or other loan products? 

Are you curious about how much of a mortgage you might qualify for? We can even answer questions or concerns about refinancing.

Get in touch with Assist Home Loans today. We’re here to put our experience and expertise to work for you.

Photo by Mikhail Nilov