Interest Only Mortgage

With the interest-only mortgage, borrowers only pay interest for the initial five- or ten-year period. After the initial period, the borrower either pays a balloon payment for the remaining balance of the loan or the payments increase to pay off the principal within the remaining period of the loan.

Pros:

1. Pay only the interest on the loan in monthly payments
2. Don’t suffer when the market rates rise
3. Predictable P&I payments
4. Lower monthly payments

Cons:

1. After initial period, the balance of the loan is due
2. Don’t benefit when market rates fall
3. Initial rate may be higher than ARM
4. Must refinance, renew, or repay early
5. No debt reduction through amortization

 

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