Interest Only Mortgage Qualification Calculator
Use our Interest Only Mortgage Qualification Calculator to determine what size interest only loan you qualify for based on your net income and monthly debt expenses. Please note that the calculator uses your net income, also known as your take-home pay, which is your income after deductions for taxes and social security. The calculator also uses your monthly debt payments, not your total debt balance, to calculate the interest only loan you can afford. The higher your monthly debt expense, including credit card, auto and student loans, the smaller the loan amount you qualify for. The more money you make, the higher the loan amount you can afford.
Borrowers can typically qualify for a larger mortgage with an interest only loan because the initial monthly payment is lower than other types of amortizing loans that require you to pay both principal and interest for the entirety of the mortgage. As demonstrated by our calculator below, with an interest only mortgage, you can afford a larger loan amount with the same monthly payment which means your mortgage dollars stretch further.
Our Interest Only Qualification Calculator determines your initial monthly payment, which does not include principal, as well as your mortgage balance at the end of the interest only period of the loan. The initial payment is based on the interest only period rate which may change and increase when the mortgage converts into an amortizing loan and you are required to start paying principal. A significant increase in your monthly mortgage payment is the primary risk of an interest only loan so you should be sure to understand this downside.
Additionally, as the calculator shows, the principal loan balance at the end of the interest only period is the same as your original mortgage amount which highlights that you do not pay down the loan initially. The calculator also factors in property tax and insurance so you can understand your total monthly housing expense. Borrowers can typically afford more home with an interest only mortgage so these other expenses tend to be higher. We also offer a version of this calculator that does not require personal information.
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Qualifying for an Interest Only Mortgage
Interest Only Mortgage Basics
With an an interest only mortgage you pay only interest and no principal during the first three, five, seven or ten years of the mortgage, which is called the interest only period, and then loan converts into an amortizing mortgage and you pay both principal and interest for the remainder of the mortgage, and the interest rate is subject to change. Interest only mortgages are often referred to as 3/1, 5/1, 7/1 or 10/1 Interest Only ARMs (IO ARMs) with the first number indicating the length of the interest only period and the second number indicating how frequently the interest rate can change during the adjustable rate period. For example, with a 7/1 interest only mortgage, you pay only interest at a fixed interest rate for the first seven years of the loan and then you pay both interest and principal plus your mortgage rate is subject to change and potentially increase on an annual basis for the remaining 23 years of the loan.
You Can Afford a Larger Mortgage
Your monthly payment during the interest only period of an interest only mortgage is lower because you do not pay any principal. Additionally, the interest rate for an interest only mortgage during the interest only period is typically lower than the rate for a 30 year fixed rate mortgage. A lower interest rate and monthly payment allow you to qualify for a larger mortgage amount as compared to other types of mortgages such as a fixed rate or adjustable rate mortgage (ARM). The ability to afford a larger mortgage is one of the key benefits of an interest only loan. Use our Interest Only Mortgage Qualification Calculator to understand the higher loan amount you can afford.
Interest Only Mortgage Borrower Qualification Requirements
Some lenders apply tougher mortgage qualification requirements for interest only mortgages. For example, lenders may apply a lower loan-to-value (LTV) ratio requirement for interest only mortgages which means borrowers are required to make a larger down payment or have more equity in their homes. Some interest only mortgage lenders also require borrowers to have higher credit scores. Additionally, following the collapse of the real estate market, many lenders stopped offering interest only mortgages due to new mortgage regulations and other considerations. Borrowers may need to contact multiple lenders to find one that offers interest only mortgages and borrowers should be sure to understand the lender's qualification requirements before moving forward with their mortgage.
Risks of an Interest Only Mortgage
Although interest only mortgages offer benefits such as a lower monthly payment and the ability to qualify for a larger mortgage, borrowers should be sure to consider the risks of an interest only mortgage. Risks of an interest only mortgage include the possibility that your monthly mortgage payment spikes in the future. When your mortgage changes from an interest only loan to an amortizing mortgage, your mortgage payment typically increases because you start paying both interest and principal plus your interest rate can increase which would cause your payment to jump even more. Interest only mortgages are typically better suited for borrowers with a higher risk appetite or who are going to sell their homes and pay off their loan before the end of the interest only period. Borrowers who prefer certainty and financial security should not select an interest only mortgage due to the potential risk of payment shock. Our Interest Only Mortgage Mortgage Qualification Calculator highlights that you have paid down none of you principal loan balance at the end of the loan's initial interest only period.
Pay Down the Loan on Your Schedule
Just because an interest only mortgage does not require you to pay principal during the initial phase of the loan does not mean you cannot do it. Many borrowers elect to pay down their principal loan balance by adding extra payments or making a lump sum payment annually or semi-annually. This is why interest only loans are well suited for applicants with significant income fluctuations or who earn a meaningful portion of their income from bonuses or commissions. The flexibility of an interest only mortgage enables these borrowers to pay down principal on a schedule that better matches the timing and amount of their earnings.
More FREEandCLEAR Mortgage Resources
Review our in-depth overview of how an interest only mortgage works including key program terms, benefits of an interest only mortgage and helpul examples
Understand the downsides of an interest only mortgage including a potential significant jump in your payment when you are required to start paying principal
Review interest rates for only mortgages based on interest only period length, loan-to-value (LTV) ratio and other factors. Comparing proposals from multiple lenders is the best way to save money on your interest only mortgage
Compare the pros and cons of an Interest Only Mortgage to other mortgage programs such as a fixed rate or adjustable rate mortgage (ARM) to select the program that is right for you
Interest Only Mortgage: https://www.fdic.gov/consumers/consumer/interest-only/index.html