Question:

What is a 10-year Interest Only mortgage?

Answer:

A 10-year Interest-Only mortgage loan is one that requires borrowers to pay only due interest for the duration of the loan instead of making a fully amortizing payment.  Interest Only home loans usually have a term of 30 years and the Interest Only option is available for 5 or 10 years. Before the end of the 10-year term the loan is usually refinanced.

For example, 10-year interest only mortgage payments on a 30-year fixed rate mortgage of $200,000 at 6.5% are $1083; the fully amortizing payment is $1264. Your monthly savings are $181.

Interest Only mortgage loans are great when home appreciation levels are high.

These are favorite loans to homebuyers because the monthly payment will be lower than a fully amortizing mortgage and they still build equity without paying down principal when home values are appreciating. However, when houses start losing value foreclosure levels on interest-only mortgages are high.

Nowadays, few borrowers would keep the Interest-Only mortgage for the entire duration of the loan. Most will refinance, or sell the house long before the 10-year interest-only period is over.

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Why: Refinance to a fixed rate loan while mortgage rates are still low.
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Common misspellings: mortage and morgage