How Interest-Only Mortgage Loans Work

In a traditional mortgage, a borrower pays a fully-amortized monthly payment. This means that they are paying the exact amount necessary in order to pay their mortgage off in full by the end of their term. Interest-only mortgage loans differ in that they do not require fully-amortized payments at the beginning of the mortgage term.

This article explains how interest-only mortgage loans work:

Interest-Only Payments

For a period of time established by your lender -- usually a few years -- interest-only mortgages only require that a borrower makes monthly payments on the interest accrued on their loan. This means that the borrower is not required to pay any amount on the principal. This makes for monthly payments that are considerably lower than fully-amortized payments.

Conversion to a Traditional Mortgage

After the term of interest-only payments, the loan converts to a traditional mortgage. This means that you will be responsible for fully-amortized payments for the remainder of the mortgage’s term. For example, if your mortgage term was 30 years with a five-year interest-only term, you would have to pay the principal off in 25 years rather than the traditional 30.

Benefits and Disadvantages

Interest-only mortgage loans can be very beneficial for borrowers who are temporarily unable to afford fully-amortized monthly payments. It is a way to rent your home from the mortgage company until you are able to start earning equity in it. However, borrowers should remember that making interest-only payments does not earn them equity in their home. Additionally, payments will be significantly higher after the period of interest-only payments than they would be if the borrower had paid fully-amortized payments for the entire term of the mortgage.

ABC Loan Guide has more information about Interest Only Mortgages or lists for Online Mortgage Brokers.
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