Interest Only Mortgage Loans - Low Monthly Payments

Interest-only loans are structured so the borrower only pays the interest on a mortgage balance for a certain amount of time. During this time period, the principal balance doesn't change. At the end of the interest-only period, the borrow has a few options. He may enter another interest-only program, he can pay the principal outright, or he can get a standard P&I (principal and interest) mortgage.

As far as interest-only mortgages go, a 5 or 10 year interest-only period is quite typical. After the interest-only period is over, the principal balance is usually amortized for the remaining number of years in the mortgage. These loan programs are often sought because they make certain borrowers able to buy a home (or buy a better home) who would otherwise not be able to afford it. During the interest-only period, the payments are substantially lower because none of the principal amount is being paid.

Something to consider if you're thinking about an interest-only loan is that during the interest-only period, you will not earn any equity on your home. You are a homeowner, but you are not accruing equity. This means that you will not be able to borrow against your home (such as with a home equity loan). Also, you will still have to pay property taxes and will likely be required to purchase homeowner's insurance, even though you are not paying down any of the balance on your principal balance.