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What Is an Interest Only Mortgage?


An interest only mortgage is a loan, which allows a borrower to pay only the interest on a home loan. The interest only monthly payments are scheduled for a set period of time. The average time frame is typically five to ten years. During that time, the dollar amount on the principal balance will remain unchanged. After the term ends, payments must be made on the principal balance. The longer the interest only term is, the higher the principal payment will be when the term ends. A borrower can also pay toward the principal on this type of loan, however it is not required during the set term.

The Benefits Of An Interest Only Mortgage

Because the monthly payments on an interest only loan are lower than a principal and interest mortgage, one of the major benefits is the immediate savings. Many people who opt for interest only mortgages are able to take the extra money saved and invest it for the future. This investment may be used for future principal payments on the loan, or it may be used as a point of security for the homeowners. Interest only payments also make it possible to purchase a larger home than what may be affordable at the time of purchase.

Who Can Benefit From An Interest Only Loan?

Interest only loans are beneficial to anyone who wants a low initial monthly payment and fully understands the loan terms. People who expect to increase their income in the future may benefit from this type of mortgage. Those who have fluctuating incomes or who don’t get paid regularly may prefer an interest only loan.

What Happens At The End Of The Term?

At the end of the agreed upon time frame, there are several options. Some homeowners choose to pay off the full balance of the loan by using the money that was saved during the interest only term. If the balance can not be paid in full, the loan may be refinanced. The refinancing changes the original terms of the mortgage and turns it into a traditional principal and interest loan.

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