In an interest-only mortgage, what does the borrower pay during the initial period?

In an interest-only mortgage, during the initial period, the borrower is required to pay only the interest on the loan. This structure allows the borrower to keep monthly payments relatively low during the initial phase of the loan, as they do not pay down the principal balance at this time.

The interest payments are calculated based on the outstanding loan amount, but because the principal is not being reduced, the loan balance remains the same until the interest-only period concludes. Once this period ends, the borrower typically has to start paying both interest and principal, which can lead to significantly higher monthly payments.

This option is aligned with the common practice of interest-only loans and highlights a key feature of this mortgage type, where borrowers initially benefit from lower payments but should be aware of the impending increase in those payments when the loan structure changes. Understanding this dynamic is important for borrowers considering this type of mortgage, as it impacts long-term financial planning and budgeting.