Interest-Only vs ARM vs Fixed Mortgage Comparison

Interest-only, adjustable-rate (ARM), and 30-year fixed mortgages serve different borrower profiles. Interest-only loans pay only interest for the first 10 years — minimal payment but zero equity built. ARMs offer 5 or 7 years of low fixed rates, then reset annually. 30-year fixed provides full payment certainty for the full term. Compare your 7-year total cost across all three to see which fits your hold horizon.

Interest-Only: Lowest Payment, Zero Equity

Interest-only loans pay only the interest portion for 10 years, then amortize over the remaining 20 years. The IO payment is much lower than a 30-year fixed (often 30-40% less). After year 10, the payment jumps dramatically because you must amortize the full balance over 20 years instead of 30. Best for: high-income earners with bonus-based or commission-based income, real estate investors who plan to sell or refinance within the IO period, and short-term holders. Risk: if you can't refinance or sell at year 10 (because rates are high, equity is low, or income dropped), the payment shock can be 50-80% higher.

ARM: Initial Discount, Reset Risk

5/1 ARMs offer a low fixed rate for 5 years, then adjust annually based on an index (SOFR + margin). Initial rates are typically 0.5-1% below 30-year fixed. After reset, your rate can move up or down based on the index. Most ARMs have rate caps (e.g., 2% per adjustment, 5% lifetime). Best for: buyers certain to sell or refinance within 5-7 years, or who can absorb a payment jump if rates rise. The 2022-2024 rate spike caused major payment shock for ARM borrowers who didn't refinance in time — a $500K ARM resetting from 3% to 8% sees monthly payment jump from $2,108 to $3,668, a 74% increase. Use 30-year fixed instead if you can't tolerate this risk.

Last updated May 2026. Sources: CFPB Mortgage Types.