Common Mortgage Types - Interest-Only Mortgage Loan
A loan is interest-only when the borrower only makes interest payments for a specified period of time, which means the principal of the loan remains unchanged for that period. In other words, the loan does not amortize. A fully amortizing loan payment includes a portion of the principal in addition to interest with each payment, thereby paying off the full amount of the loan at the end of the loan term.
Interest-only payment terms typically last only a few years, after which period the borrower starts to make fully amortizing payments. This means that the principal-plus-interest payments made after the interest-only payment period will be higher than if the borrower had made fully amortizing payments for the entire term of the loan. Interest-only loans are suited to borrowers who want a lower initial monthly payment, but expect to be able to handle higher payments in the future.