You can change your mortgage to interest only, but the route is narrower than a standard refinance. Two options exist: ask your current servicer for a loan modification that carves out an interest-only period, or refinance the loan entirely with a lender that offers interest-only products. Either way, expect to need at least 20% equity, a credit score around 700, and enough income to cover the fully amortizing payment that kicks in later, not just the reduced one you’d be paying now.
One structural reason matters up front: interest-only loans sit outside the federal “Qualified Mortgage” category because they let borrowers defer principal.1Consumer Financial Protection Bureau. 12 CFR 1026.43 – Minimum Standards for Transactions Secured by a Dwelling Fannie Mae and Freddie Mac require fully amortizing loans, so the big banks that sell to them often don’t offer an interest-only product at all.2Fannie Mae. Loan Eligibility – Fannie Mae Selling Guide These loans come mostly from portfolio lenders, credit unions with niche programs, and non-QM specialty lenders. Shopping around is not optional.
Modification or Refinance
A loan modification amends the terms of your existing mortgage. The original lien stays; the servicer just changes specific provisions like the repayment schedule.3Consumer Financial Protection Bureau. What Is a Mortgage Loan Modification? Modifications are cheaper than refinancing because they usually skip full closing costs, title insurance, and, in some cases, a new appraisal. Many servicers charge a small processing fee or nothing at all, especially when the modification falls under a loss-mitigation program. The catch: your current servicer has to actually offer interest-only terms, and many won’t. Servicers also tend to want a documented reason for the change, often some form of financial hardship.
A refinance replaces your loan outright. You take out a new mortgage that pays off the old one, with a new promissory note spelling out the interest-only period and the amortization schedule that follows.4Federal Reserve. A Consumer’s Guide to Mortgage Refinancings This opens the door to any lender in the market, which is the whole point when your current servicer can’t help you. The price is closing costs of roughly 2% to 6% of the loan amount. On a $350,000 loan, that’s $7,000 to $21,000 covering origination, appraisal, title, and recording. You’ll also requalify from scratch.
The interest-only window itself typically runs three to ten years.5OCC. Interest-Only Mortgage Payments and Payment-Option ARMs After that, the loan converts to fully amortizing payments over the remaining term.
What You Need to Qualify
Equity
Most lenders cap loan-to-value at 80%, so you need at least 20% equity. Some tighten that to 75%, particularly on investment properties or multi-unit homes. The equity cushion protects the lender against a scenario where home values slip while your balance stays flat, since you won’t be building any equity through payments.
Credit Score
A FICO score of 700 is the usual floor. Some lenders will consider 680 for borrowers who compensate with strong equity or large cash reserves. Below that, approval is unlikely regardless of the rest of your file.
Debt-to-Income
The 43% DTI cap you may have heard about applies to Qualified Mortgages. Interest-only loans aren’t in that category, so the general Ability-to-Repay rule applies, which requires lenders to consider DTI but doesn’t set a hard limit.6Consumer Financial Protection Bureau. Ability-to-Repay and Qualified Mortgage Rule Small Entity Compliance Guide In practice, non-QM lenders often set internal limits in the 43% to 50% range. Important detail: they calculate DTI using the future fully amortizing payment, not the lower interest-only payment you’d be making at first. They’re testing whether you can afford the loan after the interest-only window ends.
Occupancy
Interest-only terms come easier on a primary residence. Second homes and investment properties face higher rates, stricter LTV caps, and higher down payment requirements. For a rental, expect a lender to want 25% to 30% equity rather than 20%.
Documents and Approval
Whichever path you take, the underwriting file looks similar:
- Federal tax returns for the past two years, W-2s or 1099s for the same period, and pay stubs covering at least the last 30 days.7Fannie Mae. Documents You Need to Apply for a Mortgage
- Bank and investment statements for the past two to three months.8HUD. Section B – Documentation Requirements Overview
- A property valuation. Refinances almost always require a full appraisal. Modifications sometimes accept a desktop appraisal that relies on data rather than a site visit.
- A monthly expense breakdown covering insurance, property taxes, utilities, and other debts.
Your servicer or lender will supply the application form, often called a Request for Mortgage Assistance for modifications. Numbers need to match your source documents; rounding invites delays when the underwriter runs cross-checks against tax transcripts and bank records.
A refinance timeline typically runs 30 to 60 days from application to closing. Modifications can move faster because there’s no full origination, but some servicers require a trial payment plan first: you make the proposed new payment for at least three consecutive months to prove you can handle it before the permanent modification is signed.9eCFR. 24 CFR 1005.749 – Loan Modification Miss a trial payment and the deal usually dies.
Once you sign, the modification agreement or new note and deed of trust get notarized and recorded with the county. The updated terms aren’t official until recording happens.
If you’re denied, the lender must send a written adverse action notice within 30 days listing the specific reasons, such as insufficient income, high DTI, or a low credit score.10Consumer Financial Protection Bureau. Comment for 1002.9 – Notifications A different non-QM lender with different internal standards may still approve you. This is a market where the second and third calls often matter more than the first.
What Happens When the Interest-Only Period Ends
This is where borrowers get burned. When the interest-only window closes, the full remaining principal is amortized over whatever term is left. If you had a 30-year loan with a 10-year interest-only period, you now have 20 years to pay off a balance you haven’t touched. Payments can double, sometimes triple.5OCC. Interest-Only Mortgage Payments and Payment-Option ARMs
A simplified example: on a $360,000 loan at 7.5% with a 10-year interest-only term, monthly payments run about $2,250 during the interest-only phase. Once it ends, the payment jumps to roughly $3,160 to amortize the same $360,000 over the remaining 20 years. That’s a 40% increase with no change in rate. Most interest-only mortgages carry adjustable rates, so the increase can be considerably steeper.
You also build no equity through payments during the interest-only period. Equity only grows if property values rise. If the market dips, you can end up owing more than the home is worth, which makes selling or refinancing again very difficult.5OCC. Interest-Only Mortgage Payments and Payment-Option ARMs Converting to interest only makes the most sense when you have a clear plan for the end of the window: selling, paying the balance down with other funds, or refinancing on terms you can identify now.
Cheaper Alternatives
If your real goal is lower monthly payments or short-term cash-flow relief rather than interest-only specifically, two options are worth pricing out first.
Home Equity Line of Credit
A HELOC lets you borrow against your equity on a revolving basis. During the draw period, typically up to 10 years, many plans allow interest-only payments on the amount you’ve drawn.11Consumer Financial Protection Bureau. What You Should Know About Home Equity Lines of Credit Your primary mortgage stays untouched. Once the draw period ends, you enter a repayment phase of usually 10 to 15 years, and some plans require a balloon payment of the full outstanding balance.
Mortgage Recast
If you have a lump sum available, from selling another property or an inheritance, a recast can lower your payment without a modification or refinance. You make a large one-time principal payment and the lender recalculates the monthly payment against the reduced balance. Rate and term stay the same. Recasting fees are usually modest, often under $400. The result is still an amortizing loan, not an interest-only one, but if the objective is a smaller monthly bill, it’s cheaper and simpler than either alternative.