Interest-Only Mortgage

An interest-only mortgage is a type of mortgage in which the borrower only pays the interest on the loan each month. The principal balance of the loan does not decrease, and the borrower must make a lump sum payment of the principal balance at the end of the loan term. Interest-only mortgages are often used by borrowers who want to keep their monthly payments low, but they can be risky because the borrower can end up owing a large amount of money at the end of the loan term.

There are two main types of interest-only mortgages:

• Fully amortizing interest-only mortgages: These mortgages have a fixed interest rate and a fixed term. The borrower makes monthly payments of interest only for the entire term of the loan. At the end of the loan term, the borrower must make a lump sum payment of the principal balance.
• Non-amortizing interest-only mortgages: These mortgages have a fixed interest rate, but the term of the loan is shorter than the amortization period. The borrower makes monthly payments of interest only for the term of the loan. At the end of the term, the borrower must make a lump sum payment of the principal balance plus all of the accrued interest.

Interest-only mortgages can be a good option for borrowers who want to keep their monthly payments low, but they should be aware of the risks involved. Borrowers who take out interest-only mortgages should have a plan for how they will repay the principal balance of the loan at the end of the term.

Here are some of the pros and cons of interest-only mortgages:

Pros:

• Interest-only mortgages can help borrowers keep their monthly payments low.
• Interest-only mortgages can be a good option for borrowers who plan to sell their home before the end of the loan term.

Cons:

• Interest-only mortgages can be risky because the borrower can end up owing a large amount of money at the end of the loan term.
• Interest-only mortgages can make it difficult to build equity in your home.
• Interest-only mortgages can be more expensive than other types of mortgages in the long run.

If you are considering an interest-only mortgage, it is important to talk to your lender to understand the risks and benefits involved.