An interest-only mortgage is any mortgage type (fixed rate or adjustable rate) with an option that allows you to pay only the interest, not the principal, during an initial period of time, often five to seven years. If the borrower chooses to pay only the interest, the loan principal will still need to be paid off at the end of the period. As a result, when this period ends, monthly mortgage payments increase substantially to cover the principal, or the total loan amount must either be paid off in a lump sum or refinanced.
Interest-only mortgages offer much lower initial payments than fully amortized mortgages, but much higher payments after the initial period. Because of this structure, interest-only mortgages are often selected by individuals who expect a significant increase in their salary, those who have a smart investment plan for the money they'll save on payments that they can later apply to the larger payments, and those who receive their income in the form of unpredictable commissions or bonuses, so they may not be able to meet regular higher monthly payments initially.
