What Is an Interest Only Mortgage?

Introduction

An interest-only mortgage lets you pay only interest (no principal) for an initial period. Payments are lower at first but increase when principal payments begin. See What Is Mortgage Principal, What Is a Balloon Mortgage, and What Is Amortization.

Frequently Asked Questions

What is an interest-only mortgage?

An interest-only mortgage allows you to pay only interest (no principal) for an initial period (e.g., 5 or 10 years). After that, payments include principal and interest, so they increase.

Why would someone choose interest-only?

Lower initial payments can help with cash flow. Some borrowers expect to sell or refinance before the interest-only period ends, or expect income to rise.

What happens when the interest-only period ends?

Payments increase because you must start paying principal. The remaining balance is amortized over the remaining term.

What are the risks?

You do not build equity during the interest-only period (except through appreciation). Payment shock when the period ends. If you cannot afford the higher payment, you may need to refinance or sell.