How This Loan Works
The CFPB describes an interest-only mortgage as a loan where scheduled payments require the borrower to pay only interest for a specified period. During that period, the loan balance does not decrease unless the borrower voluntarily pays extra toward principal.
When the interest-only period ends, the borrower must address the principal balance. Depending on the loan, that may mean beginning higher monthly payments that include principal and interest, refinancing if available, selling the property, or paying the balance another way.
Why Borrowers Choose It
Some borrowers use interest-only financing to preserve monthly cash flow during an initial period, manage irregular income, or allocate capital to other planned uses.
Important Tradeoffs
Payments can rise significantly after the interest-only period. The loan balance may not fall, equity may not build through scheduled payments, and refinancing or selling may not be available when expected.
Who It May Fit
Interest only mortgages are generally better suited for financially sophisticated borrowers with strong reserves, a clear exit strategy, and comfort with future payment changes. They should be reviewed carefully against fully amortizing fixed-rate and adjustable-rate options.