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Home » What is a loan that is interest only?

What is a loan that is interest only?

An interest-only mortgage is a type of loan where you are only required to pay the interest on the loan for a set period, typically the first few years. Unlike a traditional mortgage where your payments cover both the principal (the amount borrowed) and the interest, interest-only payments focus solely on the interest accrued. This means that during the initial period of the loan, your monthly payments are lower since you’re not reducing the original loan amount. However, it’s essential to note that once the interest-only period ends, you will begin paying both the principal and interest, which could result in significantly higher monthly payments.

This type of mortgage can be beneficial for borrowers who anticipate increased income in the future or those who plan to sell the property before the interest-only period concludes. It allows borrowers to take advantage of lower initial payments while giving them flexibility in their finances. However, there are risks involved, particularly if property values decrease or if borrowers cannot handle the higher payments once the interest-only period ends.

In summary, an interest-only mortgage is a loan where you are only obligated to pay the interest for a specified period, typically the beginning of the loan term. It can offer lower initial payments and flexibility for certain borrowers but comes with the risk of higher payments later on.

(Response: An interest-only mortgage is a loan where you only pay the interest for a set period, typically resulting in lower initial payments but potential higher payments once the interest-only period ends.)