Interest-Only Loans

What Is an Interest-Only Mortgage?

An interest-only loan lets borrowers pay only the interest on the loan for a set term, usually 5 to 10 years. Following this period, the loan transitions into a standard loan schedule, where payments increase to cover both interest and principal for the remainder of the term.

During the interest-only phase:

• Monthly payments are substantially lower.
• No equity is built.
• The loan balance remains unchanged (unless extra payments are made).

Once the interest-only term ends, borrowers must start repaying the principal, which can lead to a sharp increase in monthly payments. The exact amount of the increase will depend on interest rate changes and the remaining loan term.

What Happens After the Interest-Only Period?

Once the interest-only phase ends, you have a few options:

1. Start repaying the principal: As noted earlier, your loan will now include principal and interest. As such, expect your monthly payments to increase significantly.
2. Refinance: You can refinance your mortgage, which can offer revised terms and the opportunity for lower principal and interest payments.
3. Sell the property: You can sell the home and use the proceeds to pay off the loan.

Be sure to plan your strategy well before the interest-only period ends to avoid financial strain when the payment structure changes.