What is an "interest-only" loan?
An interest-only mortgage is a loan with scheduled payments that require you to pay only the interest for a specified amount of time. The amount that you owe on the loan does not go down with each payment. Once the interest-only period ends, you may have several options:
- Paying off the loan balance all at once
- Refinancing the mortgage loan, if refinancing is available
- Beginning to pay off the balance in monthly payments, which are higher than the interest-only payments
Don't assume you’ll be able to sell your home or refinance your loan if your payment increases. The value of your property could decline or your financial condition could change. If you can’t afford the higher payments on today’s income, consider another loan.