An Interest-Only mortgage allows borrowers to pay only interest for a set period before transitioning to full amortization, resulting in significantly higher payments. These loans, available in fixed or adjustable-rate options, help buyers afford higher-priced homes initially but delay equity building.

 

For example, a $400,000 loan at 6% on a 30-year fixed mortgage has a $2,398 monthly payment. With a 5-year interest-only option, the initial payment drops to $2,000, saving $398 per month, but rises to $2,578 in year six. Many borrowers refinance before payments increase.

While this approach provides short-term savings, it increases long-term costs. It’s beneficial for those with variable incomes, as some loans allow paying only interest during lean periods and reducing the principal when finances improve.