Interest-Only Mortgages: A Jumbo-Sized Solution for the Right Borrower
If you’re hearing about interest-only mortgages and wondering, Why would I pay interest only? Isn’t the whole point to pay off the house?—you’re not alone. For people outside the real estate and finance world, the idea of paying just the interest can sound like a terrible deal. But for jumbo loan clients with loan amounts over $1 million, an interest-only mortgage can be a strategic move that keeps cash flow under control and flexibility within reach.
Let’s break down how interest-only loans work, who they’re good for, and when it’s time to grab a calculator (and maybe a CPA) to see if they make sense for you.
What Is an Interest-Only Mortgage?
An interest-only mortgage lets you pay only the interest on your loan for a set period, typically the first 5, 7, or 10 years. This means no payments toward the principal during that time—just the cost of borrowing the money. After the interest-only period ends, the loan transitions to full principal-and-interest payments for the remainder of the term.
For jumbo clients, most interest-only loans are structured as adjustable-rate mortgages (ARMs), which means the rate stays fixed for the initial period (e.g., 5 years) and then adjusts annually. The current rate for a 5/1 interest-only ARM is around 6.625%, making it an attractive option for certain high-income borrowers.
Who Benefits from Interest-Only Mortgages?
Interest-only mortgages aren’t for everyone, but they can be a perfect fit for borrowers with certain income patterns or financial goals.
Bonus-Heavy Income Earners
Let’s say you’re a corporate executive earning a $250,000 base salary and a $1 million annual bonus. Instead of locking up cash in monthly mortgage payments, an interest-only loan keeps your payments lower throughout the year, so you can apply that bonus strategically—whether toward the principal, investments, or simply enjoying life.
Self-Employed Clients with Seasonal Income
If your income fluctuates by season—say you’re a celebrity chef whose big checks roll in during the holidays or a vineyard owner whose profits peak in the fall—an interest-only loan keeps your cash flow steady during the slower months.
High-Net-Worth Borrowers with Other Investment Goals
For clients whose wealth is tied up in investments or business ventures, the reduced payments of an interest-only loan allow you to keep more cash working for you elsewhere. Why pay down principal at 6.625% when you can invest that money and potentially earn more in returns?
An Example: The Jumbo Perspective
Let’s look at a real-world scenario for a jumbo client:
Loan Amount: $1.5 million
Interest Rate: 6.625% (fixed during the interest-only period)
Interest-Only Period: 5 years
Full Term: 30 years
Interest-Only Payment:
$1.5 million × 6.625% ÷ 12 months = $8,281/month
Principal-and-Interest Payment (After 5 Years):
Once the interest-only period ends, you’ll start paying both principal and interest. If the rate remains constant at 6.625% (though it may adjust annually after the fixed period), your new payment for the remaining 25 years would be approximately $10,180/month.
The Benefit:
During the first 5 years, you’re saving approximately $1,899/month, freeing up nearly $22,788 annually to use elsewhere.
Potential Tax Benefits
One sweet bonus of interest-only loans is the potential to deduct all the interest payments on your taxes. Here’s what you need to know:
Deduction Limits: You can typically deduct interest on up to $750,000 of qualified mortgage debt, or $1 million if the mortgage originated before December 15, 2017.
High Balances: For jumbo loans exceeding $750,000, consult with a CPA to see what portion of your interest is deductible.
Maximizing Deductions: During the interest-only period, when your payments are entirely interest, your deductible amount might be at its peak.
For more detailed information, check out IRS Publication 936 or chat with your tax advisor.
Why Jumbo Borrowers Love Interest-Only Loans
Cash Flow Flexibility
Whether you’re navigating bonus season or running a business, lower monthly payments let you decide how to use your money strategically.
Short-Term Focus
If you plan to sell, refinance, or pay off the loan within the interest-only period, you might never face the higher payments at all.
Investment Opportunities
Freeing up cash from monthly payments can help you capitalize on investment opportunities or reinvest in your business.
Risks to Keep in Mind
Payment Shock
After the interest-only period, your payments can jump significantly when principal payments kick in. For example, in the scenario above, payments increase by nearly $1,900/month.
No Equity Growth
During the interest-only period, you’re not building equity unless the property value increases. This could be a downside if home prices flatten or decline.
Adjustable Rates
When the fixed-rate period ends, your rate may adjust annually, potentially increasing your payments further. Planning for this variability is crucial.
Who Should Think Twice About Interest-Only Mortgages?
Interest-only loans aren’t for everyone. You might want to avoid them if:
You plan to stay in the home long-term and want to build equity steadily.
You don’t have a solid plan for managing the higher payments after the interest-only period.
You’re uncomfortable with the possibility of rate adjustments after the fixed period.
Final Thoughts
Interest-only mortgages aren’t just a tool for lowering monthly payments—they’re a financial strategy for clients with unique income patterns and investment priorities. For jumbo borrowers earning bonuses or managing fluctuating income, they can provide unmatched flexibility and tax advantages. But like any financial tool, they come with risks that need careful planning.
If you’re considering an interest-only mortgage, let’s connect. I can help you evaluate how this loan fits into your broader financial goals—and even run the numbers so you don’t have to. After all, life’s too short to worry about math!