An interest-only mortgage is a type of home loan where the borrower only pays the interest on the loan for a specified period of time, usually 5 to 10 years. At the end of this period, the borrower must either repay the entire loan amount in full or refinance the loan into a new mortgage with principal and interest payments.
With an interest-only mortgage, the monthly payments are lower compared to a traditional mortgage where the borrower repays both principal and interest. However, this lower monthly payment comes at a cost: the borrower is not paying down the principal of the loan, so the loan balance remains the same.
Interest-only mortgages are typically used by borrowers who want to keep their monthly payments low, or by those who expect their income to increase significantly in the near future. However, this type of mortgage can be risky, as the borrower is not building any equity in the property and may face a large balloon payment at the end of the interest-only period.
It is important to carefully consider the terms and conditions of an interest-only mortgage, as well as the borrower’s financial situation and ability to repay the loan, before deciding if this type of loan is right for them.