Interest-Only Mortgages: Cash-Flow Control with Eyes Wide Open
Structure payments for flexibility—understand the trade-offs before you commit.
What Is an Interest-Only Mortgage?
An interest-only (IO) mortgage allows you to pay only the interest portion of your loan for a set period—typically 5, 7, or 10 years—without reducing the principal balance. During this IO period, your monthly payment is significantly lower than a fully amortizing loan of the same amount. Once the IO period ends, the loan converts to a standard principal-and-interest payment schedule, and your monthly payment increases to pay off the remaining balance over the remaining term.
Interest-only loans are not for everyone. They require discipline, a clear exit strategy, and an understanding that you're not building equity through principal paydown during the IO period (though you may benefit from property appreciation). However, for the right borrower—someone with variable income, investment opportunities, or a short-term ownership horizon—an IO loan can be a powerful cash-flow management tool.
At West Capital Lending, Dana Peterson works with borrowers who understand the trade-offs and want to maximize flexibility. We'll walk you through payment scenarios, help you model the transition to full amortization, and ensure you're making an informed decision that aligns with your financial goals—whether you're in Florida, Washington, or any of the 10 states we serve.
Who Should Consider an Interest-Only Loan?
Eligibility Snapshot
Quick overview of interest-only loan requirements
Credit & Income
- Minimum Credit Score: 680-700 (varies by lender and loan amount)
- Ideal Credit Score: 720+ for best rates and terms
- Income Documentation: Full documentation required (W-2s, tax returns, or bank statements)
- Debt-to-Income Ratio: Generally 43% max (calculated using fully amortized payment)
Down Payment & Terms
- Minimum Down Payment: 20-30% (higher for investment properties)
- IO Period Options: 5, 7, or 10 years
- Maximum LTV: 70-80% (primary residence), 65-75% (investment)
- Occupancy Types: Primary, second home, investment property
Understanding Rates, Fees & Costs
Interest-only loans typically carry slightly higher interest rates than fully amortizing conventional loans—often 0.125% to 0.50% higher—because lenders view them as higher risk. The rate you receive depends on your credit score, loan-to-value ratio, property type, and the length of the IO period. Longer IO periods (10 years) may cost more than shorter ones (5 years).
Payment Structure: During the IO period, your monthly payment covers only interest. For example, a $500,000 loan at 7% interest would have an IO payment of approximately $2,917/month. After the IO period ends, the same loan amortized over the remaining 20 years (assuming a 30-year total term with a 10-year IO period) would jump to approximately $3,992/month. This "payment shock" is why exit planning is critical.
Points vs. Credits: You can buy down your rate with discount points or accept a higher rate for lender credits. Given the short-term nature of many IO loans, lender credits often make more sense than paying points, but we'll run a break-even analysis based on your expected holding period.
Prepayment Flexibility: Most IO loans allow you to make principal payments at any time without penalty. This gives you the option to reduce your balance during the IO period if you have extra cash, effectively creating a hybrid strategy where you control when and how much principal you pay.
How the Interest-Only Loan Process Works
Strategy Session & Pre-Approval
1-3 daysWe'll discuss your income profile, investment goals, and exit strategy. We'll model IO vs. fully amortizing payments and issue a pre-approval letter. This step includes credit review and preliminary income verification.
Property Selection & Offer
VariesWith your pre-approval, you'll work with your agent to find the right property. Once under contract, we'll order the appraisal and begin full underwriting with emphasis on qualifying you at the fully amortized payment.
Processing & Conditional Approval
7-14 daysOur processor collects all required documents, verifies employment and assets, and submits your file to underwriting. You'll receive a conditional approval with any outstanding items needed for final clearance.
Clear to Close
2-5 daysOnce all conditions are satisfied and the appraisal is reviewed, underwriting issues a 'clear to close.' We'll coordinate with the title company to schedule your signing appointment and review your final payment structure.
Signing & Funding
1-2 daysYou'll sign your final loan documents at the title company or with a mobile notary. Funds are wired, and you receive the keys. We'll also provide a payment schedule showing when your IO period ends and what your new payment will be.
Documents You'll Need
Income & Employment
- • Most recent 2 years W-2s
- • Most recent 30 days pay stubs
- • 2 years personal tax returns (all schedules)
- • 2 years business tax returns (if self-employed)
- • Year-to-date profit & loss statement
- • Documentation of bonuses, commissions, or stock compensation
Assets & Reserves
- • Most recent 2 months bank statements (all pages)
- • Most recent retirement/investment account statements
- • Proof of reserves (6-12 months PITI typically required)
- • Gift letter (if receiving gift funds)
- • Government-issued photo ID
- • Social Security card or proof of SSN
Interest-Only vs. Fully Amortizing vs. ARM
| Feature | Interest-Only | Fully Amortizing | ARM |
|---|---|---|---|
| Initial Payment | Lowest (interest only) | Higher (principal + interest) | Lower initially, then adjusts |
| Equity Building | None (unless you make extra payments) | Automatic with each payment | Automatic with each payment |
| Payment Stability | Stable during IO period, then increases | Fixed for entire term | Adjusts periodically after initial period |
| Best For | Cash flow flexibility, short-term ownership | Long-term ownership, equity building | Expecting to sell/refi before adjustment |
| Risk Level | Higher (payment shock, no equity) | Lower (predictable, builds equity) | Medium (rate adjustment risk) |
| Exit Strategy Required | Yes (critical) | No | Recommended |
Need help deciding which structure fits your goals? Contact Dana for a personalized payment analysis.
Pro Tips & Common Mistakes
Model the payment shock before you commit. Calculate what your payment will be after the IO period ends and make sure you can comfortably afford it. Many borrowers underestimate the increase and find themselves in a difficult position.
Have a clear exit strategy. Will you sell before the IO period ends? Refinance into a new loan? Make lump-sum principal payments? Don't assume you'll "figure it out later"—plan ahead.
Consider making voluntary principal payments. Even small extra payments during the IO period can reduce your balance and soften the payment shock when the loan converts to full amortization.
Common Mistake: Treating IO loans like free money. The principal doesn't disappear just because you're not paying it down. You'll owe the full amount when the IO period ends, and your payment will increase significantly.
Common Mistake: Ignoring market conditions. If property values decline during your IO period, you may have difficulty refinancing or selling. Make sure you have backup plans and adequate reserves.
Serving Borrowers Across 10 States
Dana Peterson is licensed to originate interest-only loans in Alabama, Arizona, Colorado, Florida, Idaho, Oklahoma, Pennsylvania, Tennessee, Virginia, and Washington. Whether you're a tech executive in Washington with stock-heavy compensation, a real estate investor in Florida managing multiple properties, or a commission-based professional in Colorado, we understand the unique income profiles and market dynamics in each state.
For example, Washington's high-cost markets often make IO loans attractive for buyers who need lower initial payments to qualify, while Florida's strong rental market makes IO loans popular with investors seeking maximum cash flow. Our multi-state expertise ensures you're getting advice tailored to your local market and financial situation.
What Our Clients Say
John Sarnecky
24 October 2025
Excellent service with West Capital Funding, Irvine California. Randy Mathis is at the top of the loan business. He saved us a lot of money by getting...
Kimberly Bell
24 October 2025
Eddie at WCL made our re-fi as painless as possible. He is patient, very nice, and extremely helpful. And did it all with a great sense of humor!
Alex Kissling
22 October 2025
Jon was great to work with on the refi of our property. Our situation wasn't straightforward, but Jon listened to what we were looking for, was able t...
Shawn Landreth
22 October 2025
WCL is super easy to work with and has options that work for whatever your needs, and at whatever timing you need!
Holly Pulido
22 October 2025
Sean and his team, Ryan are the kindest communicators. It wasn't checking boxes on next steps, it was from the perspective of the loan applicant that...
Cheverlyn C
21 October 2025
Austin was able to help me with both a refi and a HELOC. We did the refi on our primary to lower the rate and then we got cash out from our investment...
Virginia Donoso
21 October 2025
I'm so happy and grateful to have found someone like Robert Martin, who guided me through this entire process. This was something completely foreign t...
Harold J
21 October 2025
Great people to work with
Janelle Carlson
21 October 2025
Excellent experience from start to finish. Super knowledgeable with an out of state purchase. Travis was very professional and quick to respond to all...
Amy Osborne
21 October 2025
Great experience with Daniel
James Cirillo
21 October 2025
Great lending institution and far superior experience vs the big banks, which are cumbersome, difficult, and inefficient. Carlos Duenas was my lender...
Justin Ryan Pokrywka
21 October 2025
Nate Ferrer was a pleasure to work with. He was a great communicator and found a loan program that worked for my unique situation. He always followed...
wendy Taylor
21 October 2025
The whole team did an outstanding job, I had a very complicated situation and everyone worked extra hard to accomplish the difficult task. Thank You E...
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20 October 2025
Brian was great to work with. He was upfront and honest about the entire process. He is also extremely knowledgeable of the process. He was the first...
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20 October 2025
The service they provided me was exceptional. Brian and his team at West Capital Lending was very quick and efficient. My first time expwrience in ref...
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20 October 2025
Prompt, excellent and trust worthy. Always welcoming and open to any concerns and questions. He was confidently and thorough communicator. He will wor...
jose alvarez
20 October 2025
Scott ! Always has taken care of our Family and trusted him .
Shannon Merritt
20 October 2025
I had the absolute pleasure of working with Aaron Beck on the purchase of my home, and I can't recommend him highly enough. From start to finish, Aaro...
Jason Duncan
19 October 2025
Ryan was great, took very little time to complete application and Ryan was there every step of the way, I would highly reccommend this loan company!
Todd Stevenson
19 October 2025
Working with Jedd Lara and his team on securing our recent mortgage was an absolutely outstanding experience from start to finish. We went into the pr...
Deborah Weisberg
19 October 2025
Sam Rubio and Clare Lenza make a fantastic team! After months of working with them, they found the best Reverse Mortgage Program to suit my needs. Sam...
Netsy Rivera
17 October 2025
I can't be thankful enough for what Rafy Boulos from WCL did for me or my family. His professionalism and knowledge to help us, has changed our life 4...
Kahana Bigelow
17 October 2025
Thank you Garrett for making our refinance as easy and painless as possible!!! It really helped lesson our stress financially. The whole process as si...
Danielle Dingwall
17 October 2025
Daniel Becerril is amazing. My go to person
Imelda Hinojosa
17 October 2025
West Capital Lending, under the exceptional guidance of Jon Meer, provided the solution I needed. The process was expedient, communication great and c...
Zoila Coto
17 October 2025
I was very happy with Nathan, he is very responsive and made the process very easy. I would give him a 10 out of ten.
Rosalie Vejar
17 October 2025
Scott is knowledgeable and professional. He listens and is very attentive when asked questions. Hope to continue working with him again in the near fu...
Eli Sewell
16 October 2025
Abraham was extremely professional and was able to answer all of our questions and got us a loan tailored to our needs!!!!
Bobby Botelho
16 October 2025
In a world full of scams and distrusting people, we investigated Sam Zadeh and West Capital Lending prior to contacting him and noticed some great rev...
Marcy Zahm
16 October 2025
Aaron was incredible—walked us through the process, asked all of the right questions to get us the loan we needed quickly and painlessly. He is a pro...
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7 September 2025
Scott went above and beyond to tailor the loan product to my unique situation. A+++
Ready to Explore Interest-Only Financing?
Let's discuss your income profile, goals, and exit strategy to determine if an interest-only loan is the right fit. Get your personalized payment analysis today.
This is not a commitment to lend. All loans subject to credit approval and underwriting guidelines.
West Capital Lending is an Equal Housing Lender. This is not a commitment to lend. All loans are subject to credit approval, underwriting guidelines, and acceptable collateral. Interest rates, terms, and program availability may change without notice. Not all applicants will qualify. Information is for educational purposes only and is not financial or legal advice.
Company NMLS: 1566096 | MLO NMLS: 173133 (Dana Peterson)
Address: 24 Executive Park, STE 250, Irvine, CA 92614
Licensed in: AL, AZ, CO, FL, ID, OK, PA, TN, VA, WA