Can you pay interest only without a rate penalty?

This is a good question and one many seem to forget. Remember, interest-only is what we call a “payment option”. The fact a loan may be “interest-only” doesn’t effect the “type” of loan, only the way it is paid.

That said, when considering “interest-only” payment loans two common practices are utilized. One is historically, interest-only payment terms were only offered on adjustable rate loan programs. So, 3/1, 5/1, 7/1, and 10/1 ARMs were the only programs that would offer an interest-only payment option. That fact gets hidden in most advertising of “interest-only” mortgages.

Next, is more to the root of your question. The “interest-only” payment option comes with a cost…rate bump if you will for the luxury of paying only the interest. If one were to stop and think, one would conclude, only paying the interest on the loan is in fact “riskier” than paying both interest and principal.

So you answer your question…yes, there is a cost…or penalty…to use your word…for take an “interest-only” payment option.