An interest-only mortgage is a financial product where the borrower is required to make monthly payments only on the interest accrued on the loan amount. Unlike traditional mortgages where payments go towards both the interest and the principal, in an interest-only mortgage, the borrower pays only the interest for a specified period. This period usually spans 7 to 10 years, after which the borrower begins paying both the principal and the interest. The total loan term for an interest-only mortgage is typically 30 years.
During the interest-only period, borrowers often have the flexibility of paying more towards the principal if they choose to do so. This can help them reduce the overall balance owed on the loan. However, some borrowers may opt for interest-only mortgages as a way to afford more expensive properties while keeping their initial monthly payments lower. It’s essential for borrowers to understand the risks associated with interest-only mortgages, particularly the potential for balloon payments at the end of the interest-only period.
In essence, a 10-year interest-only mortgage offers borrowers the benefit of lower initial monthly payments because they are only paying the interest accrued on the loan. However, it’s crucial for borrowers to have a plan for when the interest-only period ends and they must start paying both the principal and the interest.
(Response: A 10-year interest-only mortgage allows borrowers to make lower initial monthly payments by only paying the interest on the loan amount. However, borrowers should be aware of the potential for higher payments when the interest-only period ends.)