What is an interest-only mortgage loan?

Interest-only mortgage loans explained

Interest-only mortgage loans result in a lower monthly payment because borrowers are only required to pay an interest payment each month, instead of paying on both interest and the principal balance. But although the monthly payment may be lower, potential problems can arise when borrowers don’t make an effort to pay above and beyond the required payment.

Interest-only mortgages can be ideal for people who need the lowest monthly payment possible for one reason or another. People who are self-employed or who work on a commission basis sometimes choose interest only mortgages because this type of loan allows them to make large principal payments during months when their income is substantial, and then lower monthly payments during slimmer months.

If you are interested in this type of loan, it’s a good idea to make additional principal payments beyond the minimum requirement as often as possible. If additional principal payments are made, the original balance of the loan will be slowly decreased over time.

Paying down the principal balance can be beneficial for many reasons, including the fact that it will decrease the amount of interest the borrow will pay in the future.