What characterizes an Interest-Only Mortgage?

An Interest-Only Mortgage is characterized by the structure of its payments, which are exclusively composed of interest for a specified period. During this period, the borrower is not required to make any payments toward the principal balance. As a result, the total loan amount does not decrease, and the borrower is only responsible for the interest cost, which can make for lower monthly payments in the short-term. This type of mortgage is often chosen by borrowers who anticipate that their financial situation will improve in the future or those who are just starting out and want to minimize their initial payment obligations.

After the interest-only period ends, the borrower will typically need to begin making payments on both the principal and the interest, which can lead to significant changes in monthly payment amounts as the loan matures. This understanding is critical for borrowers to effectively plan their finances and evaluate whether such a mortgage aligns with their long-term financial strategies.