What is an Interest-Only Mortgage?
An interest-only mortgage allows borrowers to pay only the interest portion of their loan for a set period—typically 5 to 10 years. During this initial phase, you make no payments toward the principal balance, which means:
- Lower initial monthly payments compared to traditional mortgages
- Your loan balance stays the same during the interest-only period
- Payments increase significantly after the interest-only period ends
- Total interest paid over the loan life is much higher
After the interest-only period expires, the loan converts to a traditional amortizing mortgage. Your payments will increase dramatically as you begin paying both principal and interest over the remaining loan term (often 20-25 years).
How Interest-Only Mortgages Work in Nevada
Interest-only mortgages typically have two distinct phases:
Interest-Only Payment Period (5-10 Years)
You pay only the interest on the loan principal each month. Your loan balance remains unchanged during this period.
- Minimum monthly payments are lower
- No equity is built through payments
- Principal balance stays at original loan amount
Amortization Period (Remaining 20-25 Years)
The loan converts to a traditional amortizing mortgage. You now pay principal + interest, causing a significant payment increase.
- Monthly payments jump 50-100% or more
- Shorter amortization period = higher payments
- Risk of payment shock and affordability issues
Pros of Interest-Only Mortgages
Lower Initial Payments
Monthly payments are significantly lower during the interest-only period, freeing up cash for other investments or expenses.
Maximize Cash Flow
Investors can use the saved cash for property improvements, purchasing additional properties, or other investments with higher returns.
Afford More Home
Lower payments may help you qualify for a larger loan amount or more expensive property in competitive Nevada markets like Las Vegas or Henderson.
Tax Deductible Interest
The interest paid is typically tax-deductible (consult your tax advisor), which can reduce your effective borrowing cost for investment properties.
Cons and Risks of Interest-Only Mortgages
Payment Shock Risk
When the interest-only period ends, your payment can increase by 50% to 100% or more. Many borrowers can't afford the sudden jump and face foreclosure.
No Equity Building
Your loan balance doesn't decrease during the interest-only period. You're only building equity through home value appreciation, which isn't guaranteed.
Higher Total Interest Cost
You'll pay significantly more interest over the life of the loan compared to a traditional 30-year fixed mortgage because the principal isn't being reduced.
Negative Equity Risk
If Nevada home values decline, you could owe more than your home is worth (underwater mortgage), making it impossible to sell or refinance without bringing cash to closing.
Harder to Qualify
Lenders require higher credit scores, larger down payments (often 20-30%), and extensive financial documentation. Interest-only loans are not widely available for primary residences.
Limited Availability
After the 2008 housing crisis, many lenders stopped offering interest-only mortgages. Those that do impose strict requirements and typically only for investment properties or jumbo loans.
Interest-only mortgages played a significant role in the 2008 housing crisis. Many homeowners couldn't afford the payment increase when the interest-only period ended, leading to widespread foreclosures. Unless you have a specific, sophisticated financial strategy and cash reserves to handle payment increases, traditional mortgages are a safer choice.
Who Should Consider an Interest-Only Mortgage in Nevada?
Interest-only mortgages are not suitable for most homebuyers. However, they might work for specific financial situations:
Real Estate Investors
Investors buying Las Vegas or Henderson rental properties who plan to flip quickly or expect significant appreciation might benefit from lower carrying costs during the interest-only period. Must have exit strategy in place.
High-Income Professionals with Variable Income
Commission-based earners, business owners, or professionals expecting substantial income increases who want payment flexibility. Requires excellent cash reserves and disciplined financial management.
Luxury/Jumbo Loan Buyers
High-net-worth individuals purchasing expensive properties ($1M+) who prefer to invest excess cash elsewhere for potentially higher returns. Typically requires 30-40% down payment.
Short-Term Homeowners
Those who plan to sell within 5-7 years (e.g., military relocating, temporary work assignment in Reno). Must be certain about timeline and have realistic exit plan.
If you're buying a home to live in long-term in Nevada, traditional mortgages (FHA, VA, or conventional) are significantly safer and more cost-effective. The risks of payment shock and negative equity far outweigh the temporary benefit of lower initial payments.
Safer Alternatives to Interest-Only Mortgages
Nevada homebuyers have several better options that offer low payments, build equity, and reduce long-term risk:
FHA Loans (Recommended for Most Nevada Buyers)
- Only 3.5% down payment required (vs. 20-30% for interest-only)
- Lower credit scores accepted (as low as 580)
- Build equity from day one with every payment
- Fixed payments – no surprises or payment shock
- Nevada first-time buyer programs available
VA Loans (For Nevada Veterans & Active Military)
Conventional Loans (Low Down Payment Options)
Adjustable-Rate Mortgages (ARMs)
Let Us Find Your Best Option
Not sure which loan program is right for you? Our Nevada mortgage experts will analyze your situation and recommend the safest, most affordable path to homeownership.