Definition
With some loans, you pay only interest for the first several years with no principal reduction, then payments jump. You're not building equity during the interest-only phase.
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Interest-only periods reduce initial payments. Common in ARMs (5-7 years). After period, payments increase significantly. Principal reduction begins after period. Payment shock possible. Borrower must understand implications. Professional guidance critical. Refinancing before reset common. Strategic use by knowledgeable borrowers. Risk if property value declines. Rate increases add cost. Limited to sophisticated investors.
Pro Tip
Interest-only mortgages create payment shock risk. Understand your rate reset terms.
Example
5-year interest-only period created $500 monthly savings, then payments increased $300 at reset.