How Do Interest Only Mortgage Loans Work

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Interest-only mortgage loans provide borrowers with lower mortgage payments during the initial few years of the loan. Review the details about interest-only mortgages to decide if one would be right for you or if you should try to find the best mortgage rate for a traditional, 30-year loan.

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An interest-only mortgage is one of the many types of mortgage options available today. While this is not as popular as it was before the 2008 financial crisis that left banks stricter about their lending options, there are still some lenders out there who are willing to offer interest only-mortgages, though they can be trickier to obtain.

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For decades, the only type of mortgage available was a fixed-interest loan repaid over 30 years. It offers the stability of regular — and relatively low — monthly payments. In the 1980s came adjustable rate mortgages ( ARMs ), loans with an even lower initial interest rate that adjusts or "resets" every year for the life of the mortgage.

How do Interest only mortgages work? An interest only mortgage is when your monthly mortgage payments only cover the interest owed. The capital borrowed needs to be repaid at the end of the mortgage term, usually from the proceeds of an investment policy. As you are not paying off the capital the monthly payments are lower than a repayment.

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With a fixed-rate interest-only mortgage, you can make interest-only payments for the initial term, normally up to 10 years. At the end of the interest-only term, the loan is amortized to include principal and interest. This means payments will increase.

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How Do Interest-Only Mortgages Work? Interest-only mortgages work a little differently to a traditional repayment mortgage. With a traditional mortgage, your monthly repayments cover both the sum that you have borrowed, and the interest being charged on that loan.

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