How does an interest-only mortgage loan work?
Traditional mortgages have principal-plus-interest payments, which pay the accrued interest in full, then reduce the principal owed each month. In contrast, interest-only loans only pay off the accrued interest and none of the principal in monthly payments.SignificanceInterest-only mortgages give borrowers a lower payment option, which can help them to be able to afford the monthly payment.FunctionThe interest-only payment allows a borrower to take advantage of a lower payment while their asset accrues value. At the point of sale, the borrower can then cash in the equity built up in the home.Time FrameMost interest-only loans have a limit on the interest-only period. Typically, at year 7 or 10 of the mortgage debt, the payments turn from interest-only payments to principal-and-interest payments to begin to repay the debt in full.ConsiderationsIf a borrower is looking for an interest-only mortgage, he should consider what the monthly payments would be once the interest-only period ends.
