What is an “interest-only” mortgage?

An “interest-only” mortgage is a specific type of loan arrangement in which the borrower is required to pay only the interest for a predetermined period, typically ranging from 5 to 10 years. During this time, the principal balance remains unchanged because no payments are applied toward the loan’s principal. This structure allows borrowers to have lower initial monthly payments, which can be appealing for those who may expect an increase in income or a possible rise in property value, thus enabling them to refinance or sell the property before they start paying down the principal.

After the interest-only period ends, borrowers must start paying both the principal and interest, which can significantly increase their monthly payments. This characteristic makes it essential for borrowers to carefully consider their financial situation and future plans when choosing this type of mortgage, since the transition to full payments can come as a shock if not properly planned for.