Interest Only Loans

3/1, 5/1 and 10/1 IO LIBOR ARM (Herein, ARM means adjustable rate mortgage)

A loan is interest only if the monthly payments do not include any repayment of principal.  Some interest only mortgages have interest only payments for the entire term and have a balloon payment due at the end of the term. Other interest only mortgages have an interest only payment for a number of years and convert to a fully amortizing payment after the end of the interest only period.  Interest only ARMs are commonly referred to as IO ARMs; and, IO LIBOR ARMs have a LIBOR index.  

LIBOR (London Inter-Bank Offered Rate) is the daily reference rate based on the interest rates at which banks borrow unsecured funds from other banks in the London interbank lending market. The index is quoted for one, three and six month periods as well as for one, three, and five year periods.

The Wall Street Journal reports the LIBOR rates, and the LIBOR rate quoted in the Wall Street Journal is an average of rate quotes from five major banks.

For example the 5/1 IO LIBOR ARM has an interest only payment for 5 years which is 60 payments and then converts into a fully amortizing principal and interest payment for the remaining  25  years.  The term is 30 years with a 25 year amortization. Hence, the principal payment in month 61 is larger than it would be in month 1 of a 30 year amortized mortgage. Also, the interest rate may go up or down in month 61 as it is only fixed for 60 months. Refer to the section on adjustable rate mortgages for more information and ask one of our mortgage professionals for further details.


  • Interest only payments are smaller than principal and interest payments which helps your cash flow.
  • You have the option to pay more than the minimum interest only payment.
  • Interest only ARMs can have lower interest rates than fixed rate mortgages yet allow you to pay down principal at your own pace.  
  • It is possible to build equity faster with an interest only loan than a comparable fixed rate loan if you add any interest expense savings to a similarly amorrtized principal payment and make such a principal payment; however, you are not required to make any principal payment during the interest only period.  


  • If you are only paying interest, no money is contributed towards paying down your principal.
  • After IO LIBOR ARMs convert to fully amortizing principal and interest payments, the principal is amortized over less than 30 years and the principal component of the monthly payment is higher than a 30 year amortized principal payment.
  • It is possible that you may need to refinance your loan after the fixed period is over to keep your monthly payments low.
  • If you want to keep the home for a longer period of time, this program is risky as rates can go up thereby resulting in a larger interest expense than a fixed rate loan.
  • ARM loans also known as adjustable rate mortgage are risky because the monthly payments can increase.