Interest-Only Mortgage Definition


An interest-only mortgage is a loan that requires interest-only payments for the time being, while paying principal is postponed until some specified time. Borrowers are tempted to get an interest-only mortgage as the low payment is fixed for several years and they intend to sell or refinance until that time comes.

After the initial period of interest-only payments, the interest-only mortgage turns into conventional mortgage and principal and interest have to be paid. If borrowers didn't manage to come out of the interest-only mortgage before the fixed period expires, they may get stuck with payments they cannot afford and may face foreclosure.

Popular interest-only mortgage loans are hybrid ARMs - 3/1, 5/1, 7/1 - which are commonly used by borrowers who can't qualify for a fixed rate conventional mortgage and take exotic ARMs instead. Also, investors looking to maximize cash flow are another type of borrowers favoring interest-only mortgages.

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