What is Interest Only Mortgage

Interest-only mortgages differ from traditional mortgages in that they do not require fully-amortized payments for the entirety of their term. Interest-only mortgage loans have a certain period of time when monthly payments are based solely on the interest accrued on the loan.

The period of time in which interest-only payments are allowed is established by the lender. During this time, the borrower does not make payments on the principal of the loan; therefore, they gain no equity in the home. Making interest-only payments is similar to renting a home.

However, after the period of interest-only payments, the loan converts to a traditional mortgage. The borrower is then responsible for fully-amortized payments for the remainder of the loan’s term. This means that you would have to pay off your principal in a shorter amount of time.

Interest-only mortgage loans can be beneficial to college students and young professionals who expect their income to rise before the end of the interest-only term. This would allow them to live in their own home for a period of time before they can afford to start earning equity in it.

Borrowers who are considering entering into an interest-only mortgage loan should keep in mind that their monthly payments will be higher after the interest-only term than it would be on a traditional mortgage. They will not earn equity in their home during the interest-only payment period. Additionally, should the value of their home decrease, they could end up owing more than their home is worth.

By : ABC Loan Guide