Interest-Only Mortgage
What Is an Interest-Only Mortgage?
An interest-only mortgage allows borrowers to pay only interest for a set period before principal payments begin.
After the interest-only period ends, payments increase to cover both principal and interest.
Why It Matters in a Mortgage
Interest-only loans:
- Lower initial monthly payments
- Increase payment risk later
- Delay equity building
They may appeal to borrowers expecting future income growth or short-term ownership.
However, once principal payments begin, monthly obligations can rise significantly.
How It Works
Loan term: 30 years
First 5–10 years: Interest-only payments
Remaining years: Fully amortized payments
Total interest paid over time is often higher.
Interest-Only vs. Fully Amortized Mortgage
Interest-Only → Delayed principal repayment
Fully Amortized → Principal reduced from first payment
Equity accumulation differs. Lower payments today may mean higher payments tomorrow.
FAQs About Interest-Only Mortgages
Does interest-only reduce the loan balance?
No, principal remains unchanged during the interest-only period.
Can payments increase sharply?
Yes, once amortization begins.
Are these loans common today?
They are less common than fixed-rate mortgages.
Related Terms
