Definition
Interest-only mortgages let you pay just interest for a period (5-10 years), then begin principal repayment. Payments increase substantially when amortization begins, and you still owe the full principal after the interest-only period. They carry higher risk.
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Find my pathAbout this term
Interest-only mortgages typically offer 5-10 year interest-only periods, followed by amortization periods of 15-20 years. Payments are initially lower, but once amortization begins, payments increase substantially. These mortgages carry higher risk and are less common in residential lending.
Pro Tip
Interest-only mortgages can lead to payment shock when amortization begins; carefully plan for the higher payments.
Example
An interest-only mortgage has $1,500 monthly payments for 5 years (interest only), then payments increase to $2,400 for 25 years to amortize the principal.