How Do Interest-Only Mortgages Work?
Introduction to Interest-Only Mortgages An interest-only mortgage is a mortgage in which a homeowner only pays the interest on the monthly mortgage payment. The principal, the amount the loan is actually for, will not be paid down for a certain period of time. Most interest-only mortgages are interest-only for five to 10 years. That means that after the interest-only period is over, the homeowner will have to begin paying the principal and the interest in her monthly mortgage payment. A Comparison of Interest-only and Fully Amortizing Mortgages A comparison of interest-only mortgages and fully amortizing mortgages will help you understand exactly how an interest-only mortgage works. For example, suppose a homeowner borrows $300,000 from the bank at a 30-year fixed rate of 6.5 percent. An interest-only mortgage’s monthly payment would be $1,625. However, a fully-amortized loan, which is a loan that includes principal in the monthly payment, would be $1,896. Therefore, the interest-only
