Defintion: A mortgage in which the borrower must only pay the loan’s accrued interest for a certain number of years. After the period is up, the payments will increase and the borrower will begin to pay both the interest and the principal (the money borrowed) on the loan. This can be a significant increase in the monthly payment, as the time period to pay back the loan itself has been shortened.
Consider if you were to take out a 30-year interest-only mortgage with five years of interest-only payments instead of a fixed-rate mortgage. Initially, the payments will be lower, since you are only paying the interest. However, when you first five years are up, you must now pay the entirety of your loan over the next 25 years, whereas that same amount would have been spread out over the entire 30 year period for the fixed rate mortgage.
Only after the interest-only period expires will your loan begin to amortize. Thus, in the end, you will pay more out of pocket over the life of the loan than with other loan variants.
See Also: Amortization, Fixed-Rate Mortgage, Adjustable-Rate Mortgage
Definition: An agreement to pay back debts owed, often to tax institutions, over an installment period. This usually takes the form of monthly payments.
Blog
Twitter