A mortgage is called “Interest Only” when its monthly payment does not include the repayment of principal for a fixed period of time. At the end of the interest only period, the loan becomes fully amortized, thus resulting in greatly increased monthly payments. The new payment will be greater than if it had been amortizing from the beginning. The longer the interest only period, the larger the new payment will be when the interest only period ends.
The borrower will not build equity during the interest-only term, but this option could help you afford your desired home.
An Interest Only mortgage may lower your monthly payment in the beginning, but they actually cost more over the 30-year term of the loan. However, most borrowers repay or refinance their mortgages well before the end of the full 30-year term.
Borrowers with inconsistent incomes can benefit from interest-only mortgages, particularly if the mortgage is one that permits more than an interest-only payment. This case allows the borrower to interest-only during lower income times and use high income times or bonuses to pay down the principal.