QandAs: Loans

What is an Interest Only Mortgage Loan?

Answer:
An Interest Only mortgage loan is a loan in

which some of the payments cover the accrued interest only. The most common interest-only loan is a 30-year mortgage in which the first 5 or 10 years of payments consist of interest only.

There is no reduction in principal during this time. After this period, principal is added to the payments, and the balance starts to go down. The mortgage loan then pays off as scheduled at the end of 30 years.

Since the initial payments are lower, interest only loans are designed primarily for borrowers who expect their incomes to increase over time. Other borrowers want the reduced payments so they can put money into other investments. Since interest-only loans are riskier for lenders, you will usually pay a slightly higher interest rate.


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