A mortgage is called “Interest Only” when its monthly payment does not include the repayment of principal for a certain period of time. At the end of the interest only period, the loan becomes fully amortized, increasing the monthly payments to more than they would have been if it had been fully amortized from the beginning. The longer the interest only period, the larger the new payment will be when the interest only period ends.
You won't build equity during the interest-only term, but it could help you close on the home you want instead of settling for the home you can afford. Since you will likely refinance before the interest-only term expires, this may help you get your dream home now while realizing tax advantages and appreciate that accompany homeownership.
Mortgages with interest only payment options may save you money in the short-run, but they actually cost more over the 30-year term of the loan. However, most borrowers repay their mortgages well before the end of the full 30-year loan term.
Borrowers with variable incomes can benefit from interest-only mortgages. This is particularly the case if the mortgage is one that permits the borrower to pay more than interest-only. In this case, the borrower can pay interest-only during lean times and use bonuses or income spurts to pay down the principal.
