What Is an Interest-Only Mortgage and Should San Diego Buyers Consider One?

What Is an Interest-Only Mortgage?

An interest-only mortgage allows borrowers to pay only the interest portion of their loan payment for an initial period — typically 5 to 10 years — without any principal repayment. After the interest-only period ends, the loan converts to a fully amortizing payment where principal is paid down over the remaining term, resulting in a significantly higher monthly payment.

How Interest-Only Payments Work in San Diego

On a $1,000,000 San Diego loan at 7.0 percent, a standard 30-year amortizing payment would be approximately $6,653 per month. An interest-only payment at the same rate would be approximately $5,833 per month — saving about $820 per month during the IO period. However, after 10 years, the remaining $1,000,000 principal must now be repaid in 20 years, resulting in a payment of approximately $7,758 per month.

Who Uses Interest-Only Mortgages?

• High-income professionals with irregular income (commissions, bonuses) who want lower mandatory payments
• Sophisticated investors using leverage to maximize returns on investment properties
• Short-term buyers who plan to sell before the IO period ends
• Buyers who can invest the monthly payment savings at a higher return than their mortgage rate
• Estate planning situations with specific cash flow needs

The Significant Risks of Interest-Only Mortgages

• No equity built during the IO period — your loan balance does not decrease
• Payment shock when IO period ends — the amortizing payment can be dramatically higher
• Refinancing risk — if you plan to refinance, you are dependent on future rate availability and qualification
• Negative equity risk — if home values decline, you have no principal paydown cushion
• Not available from most conventional or government-backed lenders — typically a jumbo or portfolio product

Is Interest-Only Right for San Diego Buyers?

Interest-only mortgages are appropriate for a small subset of financially sophisticated buyers in specific circumstances. For the vast majority of San Diego home buyers, a standard fully amortizing fixed-rate loan provides better long-term wealth building. Consult both your mortgage lender and a fee-only financial advisor before choosing an interest-only structure. Rieder Homes Group can connect you with lenders who offer IO products when appropriate.

Related Reading on RiederHomes.com:

→ Blog #3: Types of Home Loans

→ Blog #12: Jumbo Loans San Diego

→ Blog #15: Adjustable Rate Mortgages

→ Blog #7: Interest Rates Explained

— Mance Rieder, Broker Associate | Rieder Homes Group | REAL Broker | riederhomes.com | 858-295-0556